Biocon Annual Report 2006 09 Income from Research Services Increased by 52% to Rs

The Promise of FUTURE THERAPEUTICS

Biotherapeutics are the medicines of the future. They hold the potential to redeﬁ ne our approach to managing illness and health. Indeed, they promise a time when diagnosis and treatment will give way to prevention and cure.

Biocon is committed to realising the potential of biotherapeutics. We are conﬁ dent that we have the deﬁ ning science, world-class capabilities and a focused vision to deliver the promise of new medicine to a waiting world. Nilima Rovshen Breast Cancer Patient

You can either live with cancer or let it take over your life. I truly believe that when you are not well, you need celebration. I keep my spirits high, stay positive and bless the medicine I take. With new and advanced cancer therapy on my side, I know I can manage my cancer and not let it get the better of me. Dr. Chetana Baswaraj Deputy Manager, Clinical Lab

We have received very encouraging clinical data on our monoclonal antibody, BIOMAb EGFR™ in head and neck cancers and now plan to extend our research to metastatic breast cancer, non-small-cell lung cancer and other cancers that express EGFR. I am conﬁ dent that antibodies will offer patients the hope for a better ﬁ ght against cancer. Jharna Roychoudhury Living with Rheumatoid Arthritis

It is becoming harder to spend time in the garden. My condition does not allow me to lift pots and tend to the ﬂ ower beds like I used to. It is sometimes painful to even grip the pruning sheers while trimming my bonsai. But I’ll never give up the things I am passionate about, because I know a cure will come... It is just a matter of time. Dr. Harish Iyer Head, Discovery Development

I believe rewards come to companies and people who are willing to look at new frontiers, challenge the status quo and take risks. Our rich discovery pipeline has the potential to create a paradigm shift in the way therapy can be administered for debilitating diseases like rheumatoid arthritis, cancer and other metabolic diseases. There are exciting times ahead! Muthu & Babu Juvenile Diabetics

Our friends keep asking us why we need to rush home twice a day for the injection. Why not tablets or syrup instead? My brother Babu still ﬁ nds it painful and gives Amma a hard time. I am different though. I try not to make a big deal about it because my hero, Shivraj- kumar would never approve. You see, I want to be a ﬁ lm star like him when I grow up. Dr. Kumaresan Senior Manager, Clinical Development and Research

I design research initiatives to explore the very real possibility of alternate methods of insulin delivery, including oral and intra-nasal. To be able to offer diabetics a painless and more targeted way of administering insulin, is for me the greatest challenge and ultimate goal. CHAIRMAN’S OUTLOOK

Biocon is rapidly transforming into an innovation-led organisation. We have developed a balance between all-round revenue growth and risk mitigation in order to build a strong and sustainable business for the long-term. The year gone by has been an infl ection point in Biocon’s received regulatory approval to commence Phase I human evolution. It represents the start of a global journey where clinical trials for our oral insulin molecule, IN 105. our approach to growth and strategy is about combining innovation with scale. Biocon will leverage India’s globally BUILDING INTELLECTUAL CAPITAL competitive cost base to deliver intellectual value. We have In March, 2006, Biocon acquired the IP assets of Nobex the capabilities to manage risk in order to build a strong and Corporation for USD 5 million. This strategic acquisition sustainable business for the long-term. provides the company with a valuable IP platform and complete ownership of the oral insulin and oral BNP Over the years, Biocon has systematically grown its technical programs. It also brings with it a novel platform technology and scientifi c skills to build a de-risked business model that that encompasses 300+ patents based on oral peptide represents a unique approach to the business of science. Our delivery in the metabolic and cardiovascular segments. multi-product, multi-business model provides an interesting We plan to leverage these proprietary assets through a balance between all-round revenue growth and risk mitigation. combination of licensing and co-development partnerships, While generic biopharmaceuticals, research services and which will play a key role in our innovation strategy for enzymes provide stable and predictable growth in the the future. medium-term, our exciting innovation-led business initiatives have the potential to realise large, exponential growth in the BIOCON PARK long-term. This, we believe, will deliver superior shareholder Since its IPO, Biocon made the single largest capital investment value in the future. in its history, the Rs. 6,500 million Biocon Park. Spread over 90 acres, this integrated biopharmaceutical hub meets Our discovery-led research programs in diabetes and international regulatory standards and represents a signifi cant oncology are making good progress. They are expected to advancement in sophistication and automation. Besides develop into large global opportunities in the next 2-3 years. multiple manufacturing blocks, laboratories and related We are on track to seek regulatory approval in India for our infrastructure Biocon Park is where India’s fi rst and largest monoclonal antibody, BIOMAb EGFR™ shortly. We have also biologics facility is located. We believe this far-sighted

Biocon Annual Report 2006 09 Income from research services increased by 52% to Rs. 1,006 million in 2005-2006 from Rs. 662 million in 2004-2005

Total Income increased by 9% to Rs. 7,932 million

investment in infrastructure and capabilities will enable us to million from Rs. 662 million, contributing 13% to operating meet global demand and seize opportunities for future growth. revenues in FY 2006. Revenues from the biopharmaceuticals and enzymes business grew 6% to Rs. 6,875 million from Rs. To meet tomorrow’s environmental challenges today, Biocon 6,463 million, contributing 87% to operating revenues in FY Park has also established a zero-discharge effl uent treatment 2006. I am pleased that total income increased by 9% to facility that incorporates some of the most advanced Rs. 7,932 million while sustaining a healthy 30% operating automation and monitoring systems. margin for FY 2005-06, despite a fi ercely competitive environment. These reassuring numbers enable us to RESEARCH SERVICES continue investing in our discovery-led research programs. Mounting pressure on the global pharmaceutical sector Consistent with our long-term growth strategy, we remain to bring down the cost of drug development has opened committed to building our biotherapeutics franchise through up large global opportunities for Indian companies in R&D. our own R&D efforts. To further enhance our IP and Syngene, a front runner in custom research, continues to technology platforms, we have made an investment of maintain its leadership position with a sustained annual Rs. 764 million in R&D, which is a 76% increase over the growth rate of over 50%. Clinigene, a clinical development previous fi scal. service provider, is now poised for large-scale growth in its business. Syngene and Biocon’s current and growing DEVELOPING PROPRIETARY PRODUCTS FOR THE FUTURE customer base will enable Clinigene to garner a strong Biocon’s pipeline of discovery-led research products is both share of the emerging global CRO opportunity. Biocon’s extensive and exciting. Leading this effort is the collaborative research services business has catalysed partnering program with CIMAB of Cuba for a monoclonal antibody, opportunities across the board, adding value to the BIOMAb EGFR™, which has recently completed a two-year company’s innovation strategy. clinical trial for head and neck cancers. This product will herald Biocon’s foray into the oncology market and BIOCON’S FINANCIAL PERFORMANCE furthermore, establish us as an innovator company. Other Revenues from research services grew 52% to Rs. 1,006 programs that are moving up the development path are oral R&D spend increased Dividend recommended 76% to Rs. 764 million at 50% (Rs. 2.5 per share)

Operating Margins sustained at a healthy 30% at Rs. 2,340 million

insulin, oral BNP, BVX 10, BVX 20 and Anti-CD6 monoclonal investing in India’s scientifi c and technological future. Above antibodies. The oral insulin IN 105, is entering into Phase I, all, it is about investing in innovation and the promise of fi rst in human studies which will provide vital information to new medicine. enable progress to the next phase. Such programs will profi le Biocon’s innovator status on an international platform. We Thank you strongly believe that these research initiatives have the With best wishes potential to become billion dollar global opportunities that will sustain the company’s research-led business aspirations.

OUTLOOK The year ahead will continue to be challenging due to Kiran Mazumdar-Shaw uncertainties in market conditions and the impact of June 2006 depreciation at our new facilities at Biocon Park. The new growth drivers: insulin, immunosuppressants and branded formulations are building our biopharmaceuticals business in a more robust manner, reducing dependence on statins. New research contracts, both at Syngene and Clinigene, will deliver additional growth. Increased capacities at Biocon Park will come fully on stream this ﬁ scal, contributing considerably to overall growth.

Finally, we thank our shareholders and business partners for the trust they have placed in us. We believe your faith is well-founded and that together, we will move forward to greater accomplishments. Investing in Biocon is about

Biocon Annual Report 2006 11 Board of DIRECTORS

Dr. Neville Bain • Chairman, Institute of Directors, UK • Board Dr. Kiran Mazumdar-Shaw • Chairman & Managing Director, Member, Scottish & Newcastle Plc., Provexis Ltd. • Former Group Biocon • First generation entrepreneur with more than 28 years CEO, Coats Viyella Plc. • Former Deputy Group Chief Executive and experience in biotechnology and industrial enzymes • Master Brewer, Finance Director, Cadbury Schweppes Plc. • Author of several Ballarat University, Australia • Awarded the Padmabhushan, one of management books on corporate governance, strategy and people India’s highest civilian awards, for her pioneering efforts in management Biotechnology, 2005

Prof. Charles L. Cooney • Professor, Chemical & Biochemical Prof. Catherine Rosenberg • University Research Chair Engineering, MIT, USA • Director, Genzyme Inc. and Bio-Processors Professor and Chairman, Department of Electrical and Computer Inc. • Recipient of prestigious awards, including Gold Medal of the Engineering, University of Waterloo, Canada Institute of Biotechnology Studies and Distinguished Service Award from the American Chemical Society Mr. John Shaw • Vice Chaiman, Biocon • Served in senior positions in various locations around the world • Chairman, Madura Dr. Bala S. Manian • Chairman and Co-founder, Reametrix Inc. Coats Ltd. between 1991-1998 • Co-founder, Quantum Dot Corporation and Surromed Corporation, USA • Expert in the design of electro-optical systems • Authored Mr. Suresh Talwar • Partner, Crawford Bayley & Co., an Indian law several peer-reviewed scientifi c publications and holder of many fi rm of repute. • Director, Cadbury India Ltd., Birla Sun Life Insurance patents • Recognised through several awards for contributions as Co. Ltd., L&T Ltd. • Area of professional specialisation includes educator, inventor and entrepreneur, including Technical Academy corporate law and related fi elds • Legal counsel to numerous Indian Award in Digital Cinematography by Academy of Motion Pictures, companies, multinational corporations and Indian/foreign banks Arts and Sciences

Prof. Ravi Mazumdar • University Research Chair Professor, Department of Electrical and Computer Engineering, University of Waterloo, Canada • Fellow of the Institute of Electrical and Electronics Engineers (IEEE) and Fellow of the Royal Statistical Society Scientiﬁ c ADVISORY BOARD

Prof. Charles L. Cooney • Chairman • Head of Chemical Dr. Bala S. Manian • Chairman & Co-founder Reametrix Inc., & Biochemical Engineering, MIT, USA Quantum Dot Corporation and Surromed Corporation, USA

Dr. Anthony Allison • Distinguished scientist, Surromed Dr. Kiran Mazumdar-Shaw • Member of the Board, Science Corporation • Former Vice President, Research Syntex Corporation Foundation Ireland • Chairperson, Vision Group on Biotechnology, • Inventor of Mycophenolate Mofetil Government of Karnataka • Chairperson, National Task Force on Biotechnology, CII Dr. Chaitanya R. Divgi • Chief, Nuclear Medicine & Molecular Imaging, University of Pennsylvania Prof. Hans Wigzell • Head, Centre for Medical Innovations • Professor, Karolinska Institute, Sweden

Biocon Annual Report 2006 13 Core MANAGEMENT TEAM

Dr. Kiran Mazumdar-Shaw Mr. Murali Krishnan K. N. Chairman & Managing Director President, Group Finance Biocon Biocon

Mr. John Shaw Mr. Rakesh Bamzai Vice Chairman President, Marketing Biocon Biocon

Dr. Arun S. Chandavarkar Mr. Shrikumar S. Chief Operating Ofﬁ cer President, Research & Development Biocon Biocon

Dr. Goutam Das Dr. Sambasivam Ganesh Chief Operating Offi cer Chief Scientifi c Offi cer Syngene Syngene

Dr. Arvind Atignal Mr. Chinappa M. B. Chief Operating Ofﬁ cer Vice President, Group Finance Clinigene Biocon Dr. Subir Kumar Basak Mr. Sandeep Rao General Manager, Business Development General Manager, Marketing Biocon Biocon

Mr. Ravindra K. C. Mr. Gautam Reddy General Manager, Production General Manager, Group HR Biocon Biocon

Dr. Harish V. Iyer Mr. Sundaresh S. R. General Manager, Research & Development General Manager, Commercial Biocon Biocon

Dr. Tara Jayaram Dr. Anindya Sircar General Manager, Quality Assurance General Manager, IPR Biocon Biocon

Mr. Ramalingeswara Rao K. Mr. Prasad B. S. V. General Manager, Marketing General Manager, Production Biocon Biocon

Mr. Akash S. Puranik General Manager, Marketing Biocon

Biocon Annual Report 2006 15

Investing in FUTURE THERAPEUTICS

• Investing in Future Therapeutics 19 • Investing in a De-risked Business Model 23 • Investing in R&D 27 • Investing in Research Services 31 • Investing in Infrastructure & Technology 35 • Investing in Human Resources 41 • Investing in Environment, Health & Safety 43 • Investing in Corporate Social Programs 45 • Financial Report 49

Biocon Annual Report 2006 Investing in Future Therapeutics 17

Investing in FUTURE THERAPEUTICS

Continuous investment in visionary science and technology, best-in-class infrastructure and innovation-driven people have enabled us to anticipate opportunities for medical breakthroughs.

Biocon recognised the potential of biotechnology when spearheads Biocon’s foray into proprietary products for few others did. We entered the biotechnology space in the cancer therapy. late 70‘s when the industry was still in its infancy. Continuous investment in visionary science and technology, best-in-class Drug development is a long and winding road that requires infrastructure and innovation-driven people have enabled us skillful navigation to demonstrate the safety and effi cacy of to anticipate opportunities for medical breakthroughs. Today, a drug. However, Biocon’s far-sighted investment strategy we are industry leaders because we leverage that investment enables us to sustain the extended journey of a drug, from to develop novel biotherapeutics for the future. the lab to advanced markets. We have expert discovery capabilities to expand the fundamental understanding of Biotherapeutics or novel diagnostics are the key to safer and disease pathways and identify new targets for novel drug more effi cacious ways of disease management. Designed to candidates. We are at the forefront of developmental work simulate the body’s way of combating a metabolic disorder or to test the safety and effi cacy of new candidates, infectious disease, these powerful new medicines represent determining their metabolism and interaction with the body a futuristic approach to healthcare, where diagnosis and and other drugs. Indeed, we are amongst those few whose treatment will eventually give way to prevention and cure. drug candidates proceed to clinical trials.

Monoclonal antibodies, an emerging subset of biotherapeutics, Biocon’s substantial portfolio of brands, an extensive patent are proving to be highly efﬁ cacious in addressing unmet estate, world-class R&D and proprietary technologies, are medical needs, especially in the areas of oncology and testimony that we are equipped for the long-term. We realise autoimmune diseases. Biocon’s impressive pipeline of future that our investment in biotherapeutics will deliver more than therapeutics is led by monoclonal antibodies and several a healthy bottomline. It promises to manage disease, restore new/generic molecules at exciting stages in the drug value health and save lives. Making possible that exciting vision of chain. BIOMAb EGFR™, a radically advanced and clinically the future inspires our people and propels our untiring superior humanised recombinant monoclonal antibody, pursuit of new medicine.

What are biotherapeutics? Biotherapeutics are a class of drugs manufactured by the use of biotechnology. Typically, large molecules such as proteins are produced by genetically engineering microbial or animal cells. Also known as biologics, they are very precise in their action, often interacting with very specifi c targets, at the cellular level, to help in the resolution of disease. Their unique biological specifi city results in far fewer toxic side-effects as compared to their small molecule counterparts, which are often less targeted. Biotherapies represent a formidable addition to the treatment options available to clinicians and provide signifi cant hope to patients with serious disease.

Biocon Annual Report 2006 Investing in Future Therapeutics 19 BIOCON’S DRUG DISCOVERY PIPELINE Novel Generic

Drug Preclinical Phase I Phase II Phase III Launch

IN 105 DIABETES

BVX 10 INFLAMMATION

BVX 20 ONCOLOGY

BIOMAb EGFR™ ONCOLOGY

TIhT ONCOLOGY INFLAMMATION

Oral BNP CARDIOVASCULAR

Streptokinase CARDIOVASCULAR

GCSF ONCOLOGY

Insulin DIABETES Drug development is a long and winding road that requires skillful navigation to demonstrate the safety and efﬁ cacy of a drug candidate, before it reaches a patient. When life is at stake, there can be no shortcuts.

DESPITE THE LONG PATH TO DISCOVERING NEW MEDICINE, BIOCON’S FAR-SIGHTED INVESTMENT STRATEGY ENABLES US TO SUSTAIN THE EXTENDED JOURNEY OF A DRUG & DRIVE THE BIO- REVOLUTION OF OUR TIMES.

Biocon Annual Report 2006 Investing in Future Therapeutics 21

Investing in a DE-RISKED BUSINESS MODEL

Our multi-product, multi-business strategy provides numerous opportunities for revenue enhancement by balancing risk, encouraging innovation and developing new products.

Biocon has a strong, long-term vision. Our state-of-the- for accelerated growth. Each business unit has global art infrastructure, scientifi c people-power and multiple responsibility, is structured by customer segment and oriented technology platforms are the result of a clear and focused towards the specifi c needs of the research-based pharma- strategy realised over a long period of successful fi nancial ceutical industry and generics formulators. Together, they performance. Today, we are a key player in the biopharma- provide multiple opportunities for revenue enhancement by ceutical space with signifi cant investments across the drug balancing risk, encouraging innovation and developing new value chain. Despite intense competition and the long path products. We cater to a broad customer base and operate in to new medicine, we are confi dent that our multi-product, different markets to diminish the risk of “market collapse” multi-business strategy will sustain our growth and allow us and dependence on a limited roster of clients. In line with this to remain at the cutting edge of new medicine. strategy, our fl exible manufacturing infrastructure helps us alter our product mix in response to customer demand, with Biocon’s innovation program is built on in-house capabilities, minimal new facility investment. Our signifi cant process proprietary technologies and a broad spectrum of global expertise in scaling-up from lab-scale quantities to large alliances. Our strong emphasis on Intellectual Property (IP) fermentation batches, at commercially viable levels, enables and technology are strong differentiators. As we transition us to increase production quantities and productivity for our from generics to innovation, we believe we can generate customers, thereby reducing time to market. cost and value arbitrage on a global basis. Our continued focus on R&D will enable us to develop new products, novel Multi-Product applications for existing products, enter new business Our biopharmaceuticals portfolio comprises small molecules, segments and deepen our intellectual asset base. biologics and proprietary molecules which are Biocon’s short, medium and long-term growth drivers. Our specialised A DE-RISKED BUSINESS MODEL knowledge in process development and the manufacture Biocon’s de-risked model represents a unique approach to of biopharmaceutical active ingredients positions us as the business of science. Our multi-product, multi-business preferred co-development partners. We will also continue to strategy is designed to balance all-round revenue growth focus on active pharmaceutical ingredients (APIs) that require with risk mitigation. advanced fermentation and synthetic chemistry skills and offer greater potential in the regulated markets, once they Multi-Business are off patent. We have also chosen to partner with generic Our business segments: Biopharmaceuticals, Enzymes, companies through API supplies, enabling us to capture Custom Research and Clinical Research give the company greater market share in the APIs segment. a high degree of stability, while also providing it with avenues

Biocon Annual Report 2006 Investing in Future Therapeutics 23 R&D Services COLLABORATIVE PARTNERSHIPS In addition to their role as independent revenue generators, Biocon’s strong emphasis on R&D has enabled us to devise our custom and clinical research services have signifi cantly our own technologies, reduce costs and expand our scientifi c increased Biocon’s overall capabilities. Our expertise in these and manufacturing capabilities. We stand to gain through service areas will continue to offer important synergies as we collaborative research programs with companies that seek in- increase the complexity and scope of our own R&D and licensing or product development by sharing or contributing manufacturing operations, especially in new product to part of the clinical or process development costs. We shall discovery and development. continue to pursue strategic partnerships/acquisitions with global players for sales, marketing or joint discovery of new As an experienced custom research provider in a low-cost drug molecules. environment, we are well-placed to work with innovator companies in developed markets that seek to bring out As a strategic business building initiative, Biocon is exploring new proprietary products, while reducing research and EU, US and other markets to supply biogenerics (insulin, development costs. Further, our clinical research services GCSF, etc.). We are in the process of commercialising our fi rst continue to provide faster results and affordable clinical human monoclonal antibody BIOMAb EGFR™ and will “proof of concept” studies, making us “partners of choice” identify partnerships with biotechnology companies for scale- in global outsourced custom and clinical research initiatives. up and production of these novel antibodies. We are also exploring strategic collaborations to co-develop recombinant therapeutics, antibodies and a host of in-licensed products.

MONOCLONAL ANTIBODIES & ENZYMES SMALL MOLECULES r-DNA PROTEINS ANIMAL CELL CULTURE

• Specialty Food • Statins • r-Human Insulin • Monoclonal Antibodies • Industrial Enzymes • Immunosuppressants • GCSF Monoclonal Antibodies

Immuno- suppressants

CRO

Insulin

BIOCON’S MULTI-BUSINESS REVENUE SHARE Research Services Biopharmaceuticals 75% Statins Research Services 13%

Enzymes 12% 2004 2006 2008 2010 GROWTH DRIVERS

In the competitive biopharmaceutical landscape, companies with differentiated models have a distinct edge. Biocon’s IP-led technology advantage, novel drug delivery and clinical development strategies empower us to explore novel targets for unmet medical needs.

Biocon Annual Report 2006 Investing in Future Therapeutics 25

Investing in R&D

Biocon is committed to investing in comprehensive scientiﬁ c infrastructure to provide state-of-the-art support to all our R&D programs.

Each new day brings us closer to profoundly changing the biotechnology companies across the world. Biocon’s R&D course of a disease. It is this possibility that drives our strategy encourages a symbiotic environment that draws on commitment to medical innovation. In a knowledge-driven collective resources and knowledge. We have forged an industry such as biotechnology, continual investment in R&D exciting alliance with Karolinska Institute – Sweden’s leading will sustain long-term growth and determine a company’s medical university, reputed to be among Europe’s best. The success in the discovery and development of new medicine. institute’s reputation for visionary science has afforded it the exceptional honour and responsibility to nominate the Nobel At Biocon, our focus on IP and technology is our key Prize for Medicine and Physiology every year. This has given differentiator. We are committed to the development of Karolinska Institute an enviable network within the scientifi c comprehensive scientifi c infrastructure to provide state-of- community, making its faculty an extremely valuable resource the-art support to all our R&D programs. The increasing in the fi eld of medicine. complexity of experimental and analytical techniques makes it more important than ever to create a research milieu with Acknowledging Biocon’s contribution to breakthrough suffi cient critical mass of both human expertise and technical medicine, our President, Research & Development, Shrikumar resources. Biocon will continue to invest in R&D facilities to Suryanarayan, was appointed honorary visiting faculty at the fund discovery-related programs for new molecule development. department of molecular medicine, Karolinska Institute. Further strengthening our relations, Biocon welcomed Dr. Hans In line with this strategy, we are setting up new laboratories Wigzell, former President of the Karolinska Institute and past to facilitate expansion of our combined research activities. We Chairman of the Nobel Assembly, onto its Scientifi c Advisory plan to bring in specialised scientifi c and regulatory skills and Board. Dr. Sanjeevi Carani, Associate Professor at Karolinska further invest in infrastructure for the biologics pilot plant to Institute, will also interact with Biocon as Scientifi c Advisor. produce molecules for Phase I and Phase II clinical trials. To formally initiate collaboration in research and research- BIOCON-KAROLINSKA INSTITUTE education, a Memorandum of Understanding was signed No single biopharmaceutical organisation has access to between Biocon and Karolinska Institute. This partnership will greater than 1% of the world’s R&D talent. Given the provide valuable access to a world of medical knowledge and industry’s need for high levels of innovation and increased scientifi c training, together with opportunities for exchange productivity, we frequently supplement our own efforts by of scientists to facilitate projects in areas of mutual interest. working collaboratively with academic institutions and

Biocon Annual Report 2006 Investing in Future Therapeutics 27 Collaborative projects will include:

Partnering in product development with Vaccinex, USA Joint PhD studies at Karolinska Institute Joint research programs between Karolinska Institute and Biocon Partnering in product development with the Centre of Molecular Immunology (CIM), Havana INTELLECTUAL PROPERTY (IP) A company’s IP portfolio is its most critical asset, Biocon’s monoclonal demonstrating its intellectual capability on a global platform. The total number of patent applications ﬁ led by Biocon antibody, BIOMAb stands at 266, of which 76 are international PCT applications. Till date, Biocon has been granted 37 patents, including 8 in EGFR™ has completed the USA. Phase IIb clinical trials Recent acquisition of Nobex’s IP assets has greatly enhanced Biocon’s extensive scientiﬁ c and technical resources. With an with promising results. additional 300+ patents and patent applications, we now have one of the industry’s leading IP portfolios in the area Regulatory approval of structural transformation of naturally occurring peptides of therapeutic utility. This acquisition has allowed Biocon to for India is expected wholly own the on-going oral insulin and oral BNP programs, during FY 2006-07. and gain access to additional innovative technologies and therapeutic paradigms. Biocon will leverage these proprietary Simultaneously, our oral assets through a combination of licensing and co-development partnerships. insulin, IN 105 is getting ready to enter Phase I for human clinical trials.

Biocon Annual Report 2006 Investing in Future Therapeutics 29

Investing in Research Services SYNGENE + CLINIGENE

Syngene and Clinigene are pioneers of the Indian custom and clinical services industry. In a short span of time, the two companies have built an impressive reputation for collaborative, timely and cost-effective research provided to a global clientele.

SYNGENE CONTRACT BIOMANUFACTURING (CBM) Syngene is today one of India’s leading custom research With an increasing number of biologically-derived molecules service providers. Our state-of-the-art infrastructure and a being approved, demand for CBM is expected to rapidly broad set of service offerings, enable us to participate in grow over the next few years. Syngene is setting up new the drug development process, from discovery to supply GMP level pilot facilities for both mammalian and microbial of development compounds. Syngene’s annual compound production up to Phase I and early Phase II. This is in addition growth rate of 50% over the last fi ve years refl ects our to the existing GMP grade chemical plant which supplies increased acceptance as a “research hub” for the biggest advanced intermediates and fi nal products for preclinical use. names in the global pharmaceutical industry. Having fi rmly The CBM plant will augment Syngene’s ability to become a established our reputation amongst leading European and full-service provider to its clients. American pharmaceutical companies, we now aggressively target newer markets like Japan, and a large number of small biotechnology and specialty pharmaceutical companies from Syngene is entering around the world. To facilitate these opportunities for growth, Syngene is investing in additional laboratories a new phase in drug located at Biocon Park. discovery with the DISCOVERY AND PROCESS RESEARCH Syngene offers combinatorial library production and analog introduction of novel synthesis support to clients in the fi eld of medicinal chemistry. We are working on expanding our offering in this area by technologies and providing additional services such as focused libraries, libraries advanced, knowledge- based on biological targets frequently employed by discovery companies and delivering ready-to-use plates from different driven service concepts. biological high throughput screening. In addition, Syngene has established a new kilo laboratory and process development facility to service clients with validated preclinical compounds, which require to be accelerated into clinical investigation. We also undertake risk estimation studies associated with process scale-up in the chemical industry.

Biocon Annual Report 2006 Investing in Future Therapeutics 31 A COLLABORATIVE MODEL FOR DRUG DISCOVERY trials for multinational pharmaceutical companies, the scaled- Syngene has initiated a program to develop novel molecules up establishment will have a new unit for Phase I trials and based on a collaborative business model. We have been also offer world-class biometrics & data management services. actively working together with an European client to identify a novel drug candidate that will supplement the traditional Clinigene’s clinical lab continues to conduct dedicated clinical antibiotic treatment for infectious diseases caused by Type III trials, research/cohort studies and offer comprehensive Secretion (TTS). During this joint effort, Syngene will play a laboratory services. We are the ﬁ rst lab in India to be major role in lead optimisation, preclinical studies and accredited by CAP (College of American Pathologists) and efﬁ cacy testing studies up to Phase III. The successful NABL (National Accreditation Board for Testing and completion of this project will help us achieve an unmet Calibration Laboratories). Endorsing the capabilities of our medical need and provide relief to patients in developing services, a leading global generics company will now be using nations that have high propensity of TTS-based infection. our lab as their central laboratory.

PK/PD and drug interaction studies are being successfully CLINIGENE carried out at Clinigene’s bioanalytical lab, while our human The demand for outsourced clinical research continues to pharmacological unit is well-reputed for its bioavailability, grow exponentially. Clinigene, our Clinical Research bioequivalence and various pharmacokinetic investigations. Organisation, will extend its operations to a 60,000 sq ft All studies at Clinigene are completed in full compliance with state-of-the-art facility by FY 2007. To augment our proven international regulatory requirements and strictly monitored capabilities in conducting internationally benchmarked clinical by our exclusive quality assurance department. Clinigene’s ability to attract exceptional scientiﬁ c talent, institute world-class facilities and maintain global ethical and regulatory standards, has made it “a partner of choice” for global pharmaceutical and biotechnology companies.

Biocon Annual Report 2006 Investing in Future Therapeutics 33

Investing in INFRASTRUCTURE & TECHNOLOGY

Biocon’s unique ability to develop and manufacture biologics is a key asset. Our monoclonal antibody technology and strategic investment in Biocon Park will enable us to focus on new therapy and capture opportunities for future growth.

Biocon is one of the few biopharmaceutical companies BIOCON PARK investing in end-to-end capabilities spanning the entire drug In a major step to meet global demand and capture future development value chain. We believe that our investments in growth opportunities, Biocon made the single largest capital multi-disciplinary science and technology, together with our investment in its history – Biocon Park, a Rs. 6,500 million expertise in the development of biotherapeutics, will provide integrated biopharmaceutical manufacturing hub, spread over quantum growth drivers for the future. 90 acres. Biocon Park is effi ciently laid out in accordance to a master plan with multiple manufacturing facilities, laboratories Monoclonal antibodies – a new class of drugs in the area of and associated infrastructure to handle a variety of operations biotherapeutics – are effectively addressing unmet medical including large-scale microbial fermentation, primary recovery, needs especially in oncology and autoimmune diseases. chemical conversion and purifi cation. Facilities are GMP Through the dynamic science of monoclonal antibody compliant, meet strict international regulatory requirements technology, Biocon is focusing on novel therapies designed and represent a signifi cant advancement in sophistication and to profoundly improve the lives of patients. automation. The biologics facility is one amongst an integrated cluster of biopharmaceutical manufacturing units established BIOLOGICS FACILITY on the campus. Biocon, through its joint venture company Biocon Biopharmaceuticals, has established a new, large-scale, Biocon Park fi rmly establishes our presence in the challenging multi-product biologics facility at Biocon Park. This state- fi eld of biopharmaceuticals. With a growing global market for of-the-art facility will position us as a leading global player in high-quality, yet cost-effective manufacturing capabilities in the area of cell-culture fermentation, the core manufacturing protein and monoclonal antibody therapeutics, Biocon, through technology for monoclonal antibodies. Benchmarked to the its strategic investments in infrastructure and technology, is well highest international standards, the 120,000 sq ft building positioned to capture the opportunities this presents. spread over three fl oors with process, laboratory and technical support areas, comprises three distinct functional modules: CO-DEVELOPMENT OPPORTUNITIES Partnerships for the co-development of biotherapeutics • Cell Culture Module for monoclonal antibodies and other continue to be the way forward. Our new biologics facility therapeutic proteins has an in-built, 4-fold expansion capacity to cater to Biocon • Aseptic Formulation and Filling Module for liquid vials, Biopharmaceuticals’ robust research pipeline and the cartridges, lyophilised vials and prefi lled syringes development needs of potential partners. Additionally, the • Quality Control Module scalable infrastructure at Biocon Park will enable us to collaborate with like-minded innovator companies, thus driving future opportunities for growth and expansion.

Biocon Annual Report 2006 Investing in Future Therapeutics 35

BIOCON HAS MADE THE SINGLE LARGEST CAPITAL INVESTMENT IN ITS HISTORY TO ESTABLISH BIOCON PARK – AN INTEGRATED BIOPHARMACEUTICAL MANUFACTURING HUB, SPREAD ACROSS 90 ACRES.

Biocon Annual Report 2006 Investing in Future Therapeutics 39

Investing in HUMAN RESOURCES

At Biocon, our pioneering spirit makes us unique. We have successfully harnessed the power of brilliant minds and challenged conventional thinking to push the boundaries of science.

The ability to transform goals into realities, create new attracting the best talent from India and abroad. The need models for success and sustain high levels of growth, lies to grow our talent from within and maintain a nurturing with our people. The past twelve months have witnessed environment for new skills remains a critical focus area. exciting progress across Biocon’s multiple initiatives in We want our people to be our brand ambassadors – their drug discovery, development and commercialisation. Our experience providing testimony to Biocon’s strong and outstanding young researchers supported by professional dynamic culture of scientifi c enquiry and teamwork. management and staff have been instrumental in bringing several projects closer to realisation. LEADERSHIP DEVELOPMENT We believe that leadership development is a major Biocon recognises that nurturing and recruiting the best contributor to sustainable business growth. During the year, talent is as vital to the health of any biopharmaceutical we have focused on robust succession planning processes. company as the next breakthrough product. Through Our Internal Development Program and the Biocon Mentor continuous improvement programs and an environment that Program have been successfully implemented to nurture and encourages new thinking, we believe we can not only develop leaders across the enterprise. participate in the world of biotherapeutics but actively work towards transforming it. RECOGNITION AND REWARD At Biocon, our goal is not merely to motivate our employees Biocon, Syngene, Clinigene and Biocon Biopharmaceuticals to accomplish organisational objectives but to surpass them. together employ approximately 2,000 highly qualifi ed We encourage our people to exceed expectations by offering scientists, medical practitioners, pharmacologists, engineers, them more than standard modes of compensation, like salary fi nancial, legal, marketing analysts and general and benefi ts. Biocon has instituted an exciting and motivating administrators. 10% of our employees hold a PhD degree program of recognition and reward to inspire the best and nearly 50% are post graduates. Through our annual performance among our people and more importantly, make development review and regular development discussions, them feel valued by peers and management alike. Initiatives individual action plans are meticulously worked upon, implemented in FY 2005-06 include: outlining training requirements. We provide our people continuous opportunities for active learning and development - Orientation beyond the work space which will be key drivers for personal growth as well as the - Individual development plans company’s success. - Coaching and mentoring - Accelerated advancement ATTRACTING NEW TALENT - Performance management with REAL feedback Biocon’s recruitment schemes have been highly successful in and coaching

Biocon Annual Report 2006 Investing in Future Therapeutics 41

Investing in ENVIRONMENT, HEALTH & SAFETY (EHS)

Biocon aims to balance business interests, safety and environmental considerations by investing in state-of-the-art technologies that have minimal environmental impact.

We respect the fact that our people must operate in a safe products) against global EHS standards. To facilitate this task, and hazard-free work place and our facilities adhere to eco- we have set up a modern, GMP compliant quality control effi cient production practices. Our commitment to EHS is laboratory with the latest analytical equipment to ensure demonstrated in the stringent, globally recognised standards timely and accurate testing at every stage in the lifecycle of we have adopted. Biocon is ISO 14001:2004 certifi ed for a drug. environmental protection and OHSAS 18001:2000 approved for good practices vis-à-vis occupational health and safety at Worker health and safety remains a key priority at Biocon. the workplace. Our committed EHS department is continuously promoting safety awareness among employees and associates, at every To ensure that our premises are zero-discharge, we have level. We have conducted close to 7,500 man hours of installed a world-class effl uent treatment plant and state-of- specialised safety training to defi ne policies, set standards, the-art, multi-effect evaporators to handle all aqueous waste. support their implementation and verify compliance. We have also commissioned one of India’s largest incineration complexes for pyrolytic disposal of our organic residues. Biocon is an ethical biopharmaceutical company. We aim to Together, these measures offer the dual benefi t of environ- achieve operational excellence and environmental mental protection and saving a precious resource, water. sustainability by continuously upgrading our EHS policies, ensuring strict compliance to international standards Another critical component of our corporate EHS policy is and proactively looking at new avenues for responsible testing the entire supply chain (from raw materials to fi nished development.

Biocon Annual Report 2006 Investing in Future Therapeutics 43

Investing in CORPORATE SOCIAL PROGRAMS

As a biopharmaceutical company located in a developing country, we believe our investment in better healthcare goes beyond developing new medicine.

Biocon has outlined an integrated outreach strategy that hospitals is diffi cult. Each clinic will be equipped with a combines programs involving public health and sanitation in doctor’s consultation room, a BIOCARE pharmacy and a rural communities, with a strong commitment to promoting diagnostic laboratory. education, especially amongst underprivileged youth. In Year 1 alone, close to 60,000 people enrolled with the INITIATIVES IN HEALTH scheme. To date, 17,000 patients have availed of our outpatient service and 200 undergone surgical procedures. In Arogya Raksha Yojana Health Insurance Scheme Year 2, we aim to swell our enrollment and offer the scheme The Arogya Raksha Yojana Trust, (comprising of Biocon to patients in neighbouring districts. We intend to extend our Foundation and Narayana Hrudayalaya Hospital), in reach throughout Karnataka in the next few years. collaboration with ICICI Lombard General Insurance Company launched the Arogya Raksha Yojana Health Health Camps Insurance Scheme in February 2005. The aim of this Active health camps for underprivileged rural communities program is to provide high-quality, yet affordable health- organised by the Biocon Foundation provide diabetes care to economically weaker urban and rural communities. screening, ophthalmology and gynaecology checks. These ensure timely medical attention, while also spreading health For an annual premium of as little as Rs. 120, the scheme and disease awareness. offers medical insurance coverage through a network of 20 hospitals located in and around the target districts. Members Preventive Health and Hygiene Promotion Program are entitled to free surgery and outpatient consultation as Education in health and sanitation is critical in the prevention well as medical hospitalisation, access to good quality and spread of communicable diseases. To this end, Biocon diagnostic tests and generic drugs, at subsidised rates. Foundation has initiated programs to educate village communities about the importance of basic hygiene in the To support the Health Insurance Scheme, Biocon Foundation home. Advocating “good hygiene leads to good health”, has set up two Arogya Raksha Yojana Clinics. We plan to we work closely with rural people to impress upon them the establish fi ve more in remote rural areas where access to benefi ts of living in a cleaner, healthier environment.

Biocon Annual Report 2006 Investing in Future Therapeutics 45 Besides personal hygiene and environmental sanitation, challenges of the subject in later years. In collaboration with we also focus on reducing infant mortality, promoting child Pratima Rao, a math teacher from Bangalore and the health and nutrition, health and empowerment of women. Macmillan Press, Biocon Foundation is developing a Math Self We currently undertake these programs in 51 villages, 8 Help Book that aims to inculcate a love for the subject as well slums and 25 schools, through them reaching out to 7,000 as foster a habit of self study. Initially, these books will be children and nearly 3,000 women. available in Kannada and distributed to 11,000 children, studying in Grade 1 and 2 of government primary schools. We Pulse Polio and Hepatitis B hope to extend this facility to higher classes in the near future. Our polio immunisation drive and hepatitis B camps have so far covered 45 villages. Since its inception in 2000, over Research Grant – University of Calcutta 5,000 children have been immunised against polio and more To encourage talent and support academia, Biocon than 35,000 vaccinated against hepatitis B. These annual Foundation has initiated a grant for talented and deserving programs are entirely conducted by volunteers from Biocon. students of the Guha Centre for Genetic Engineering and Biotechnology, University of Calcutta.

INITIATIVES IN EDUCATION Indian Centre of Psycho-Oncology for Education & Research (ICOPER) Fun with Math ICOPER is a novel, pioneering effort in the ﬁ eld of cancer care We believe an excitement for math, if encouraged at an early and treatment. Spearheaded by Dr. Brindha Sitaram, a age, will go a long way in helping students cope with the leading psycho-oncologist, it is supported by several highly regarded oncologists. Recognising a shared focus in developing new drugs for cancer, Dr. Mazumdar-Shaw has accepted the position of chairperson of the institute. ICOPER will train oncologists to become psycho-oncologists, undertake research, develop patient support groups, compile literature for cancer education, and undertake tobacco de- addiction programs – all efforts aimed at a holistic approach to the treatment of cancer.

Biocon Annual Report 2006 Investing in Future Therapeutics 47

[THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK] Biocon Limited

Biocon Limited

DIRECTORS’ REPORT

Dear Shareholders, We are pleased to present the twenty-eighth Annual Report of Biocon Limited (‘Biocon’) together with the audited financial statements and the auditors’ report for the financial year ended 31st March 2006. The financial highlights for the year under review are given below:

Corporate Results Rs in Millions Particulars for the year ended March 31, 2006 2005 Total Revenues 6,932 6,622 Total Expenditure 5,078 4,536 Profit before interest, depreciation and tax 1,854 2,086 Interest 17 20 Depreciation 228 181 Profit before Tax 1,609 1,885 Income Tax 274 141 Profit after Tax 1,335 1,744 Surplus b/f from previous year 2,385 1,044 Profit available for appropriation 3,720 2,788 Proposed dividend on equity shares 250 200 Tax on proposed divided 35 28 Transfer to General Reserve 133 174 Balance in Profit and Loss account 3,301 2,385

Consolidated results ( Under Indian GAAP) Rs in Millions Particulars for the year ended March 31, 2006 2005 Total Revenues 7,932 7,282 Total Expenditure 5,592 4,888 Profit before Interest Depreciation and Tax 2,340 2,394 Interest 18 20 Depreciation 297 223 Profit before Tax 2,025 2,151 Income Tax 305 186 Profit after Tax 1,720 1,965 Minority Interest 20 10 Profit after Tax and Minority Interest 1,740 1,975

Biocon Annual Report 2006 Financials 5151 Results of Operations During the year under review, consolidated revenues grew 9 percent while Operating Profits (EBITDA) and Profit after tax declined by 2 percent and 12 percent respectively. The lower profits were due to the challenging conditions in the European Statin markets with sharp price erosion adversely impacting margins. Operating profit margins were however sustained at a healthy 30% due to a very broad and attractive spread of our business and high efficiency of our manufacturing operations.

A detailed performance analysis is given in the Management Discussion and Analysis Report.

Appropriations Dividend The Board of Directors recommend a dividend of 50%, which is Rs 2.50 per equity share of the face value of Rs 5 each.

Transfer to Reserves We propose to transfer Rs 133 Millions to the General Reserves. An amount of Rs 3,301 Million is proposed to be retained in the proﬁt and loss account.

Consolidated financial statements As stipulated in the listing agreement with the stock exchanges, the consolidated financial statements have been prepared by the Company in accordance with the relevant accounting standards issued by the Institute of Chartered Accountants of India. The audited consolidated financial statements together with Auditors’ Report thereon form part of the Annual report. The consolidated net profits of the Group for the year ended 31st March 2006 amounted to Rs 1,739 Million as compared to Rs 1,965 Million in the previous financial year. This represents basic earnings per share of Rs 17.39 of the paid up capital.

Business Operations overview and Outlook The Statin sales were affected during the year despite sharp volume growth and increased market share, due to significant pricing pressure in European Markets. Sales were also affected due to delayed launch of Pravastatin and Simvastatin in the United States consequent to the grant of 6 months exclusivity to the generic players who were the first to file ANDAs. However, the opening up of the US market in the later half of FY 2007 is likely to see a surge in sale of statins. To meet this increased demand, the Company is setting up a new facility at Biocon Park and is expected to commence commercial production later this year.

The Company has made signiﬁcant progress in Insulin with increased sales in both the domestic and export markets. The product is under registration in over 25 countries in Asia and Latin America and in addition, the Company is in negotiations with various partners for registering the product in the EU markets. During the year the Company has also entered into a product licensing agreement with a speciality pharmaceutical Company in Europe, for developing and marketing an intranasal spray formulation for administering insulin in 85 countries across Asia, Africa, and the Middle East. The agreement also involves a long-term supply of bulk insulin by Biocon.

Immunosuppressants has also been a key contributor to the overall sales growth of 8% in bio-pharmaceuticals . This segment will offer signiﬁcant growth opportunities during 2008 to 2010 consequent to product patent expiry of two key products in this segment.

Sales of Enzymes declined during the year due to capacity constraints. The increased capacity consequent to the setting up of the new facility at Biocon Park is expected to also contribute to the growth of Enzymes in the coming years.

Retail sales of Insulin and a range of cardio-diabetic drugs have made good progress in the Indian market and is expected to substantially build on this initial success.

Biocon continues to make good progress in its drug discovery initiatives. During the year, biocon acquired the intellectual property assets of its research collaboration partner Nobex Corporation, USA to gain full ownership of the on-going oral insulin and oral B- type natriuretic peptide (BNP) programmes. This acquisition of nearly 300 patents and patent applications focussed on oral peptide therapeutics in the metabolic and cardiovascular segment also provides Biocon with access to additional innovative technologies and new therapeutic paradigms.

During the year, Biocon Biopharmaceuticals Private Limited has completed clinical trials in head & neck cancer for a novel anti-EGFR monoclonal antibody. Other monoclonal antibodies that are moving up the development path are BVX 10, BVX 20 and anti-CD6. These programs are expected to transform Biocon into an innovator Company.

Subsidiaries and Joint Ventures

Syngene International Private Limited: For the Financial Year 2005-06, Syngene registered strong growth of 49 % in revenues from Rs 661 Million to Rs 982 Million and 64% at the proﬁt after tax level from Rs 275 Million to Rs 452 Million. Biocon Limited

Syngene is today one of India’s leading custom research service providers. Syngene’s state-of-the-art infrastructure and a broad set of service offerings, enable it to participate in the drug development process, from discovery to supply of development compounds. Syngene’s annual compound growth rate of 40% over the last five years, reflects its increased acceptance as a “research hub” for the biggest names in the pharma industry. Having firmly established its reputation amongst leading European and American pharma companies, Syngene plans to aggressively target newer markets like Japan and a large number of small biotech and specialty pharma companies from around the world. To facilitate these opportunities for growth, Syngene is investing in additional laboratories located at Biocon Park.

Syngene has a strong knowledge base, where out of the total strength of 528 employees (387 in the previous year) more than 90% employees are scientists. With the focused and collaborative efforts of its employees, Syngene has achieved greater heights during the year and has built a strong international reputation.

Clinigene International Private Limited Clinigene International Private Limited is a wholly owned subsidiary of your Company focussed on Clinical Development.

For the current ﬁnancial year, Clinigene incurred a loss of Rs 10.9 Million as against a loss of Rs 29.4 Million in the previous year. The Company registered a revenue of Rs 56.5 Million as against Rs 14.0 Million in the previous year.

Clinigene continues to build a very solid foundation. The demand for outsourced clinical research continues to grow exponentially. Clinigene will extend its operations to a 60,000 sq ft facility by the ﬁrst quarter of FY 2007. To augment Clinigene’s capabilities in conducting internationally benchmarked clinical trials for multinational pharma companies, the scaled-up establishment will have a new unit for Phase I trials and also offer world-class Biometrics & Data Management Services.

Biocon Biopharmaceuticals Private Limited This is Biocon’s 51:49 JV with a Cuban Company, to manufacture monoclonal antibodies and other Recombinant therapeutics. The most advanced therapeutic being developed is a monoclonal antibody, BIOMAB EGFR for the treatment of head and neck cancers and represents a signiﬁcant initiative in the Company’s foray into original molecules.

Construction of a state of the art Biologicals facility at ‘Biocon Park’ is complete. This facility is the ﬁrst of its kind in India. The validation of the facility is underway and commercial production is expected to commence in 2006-07.

Report on subsidiary companies The Company has obtained exemption from the Government of India, Ministry of Company affairs from attaching the financial accounts of the subsidiary companies to this Report pursuant to Section 212 of the Companies Act, 1956, as the Company discloses consolidated accounts under Indian GAAP as well as US GAAP. However, a statement showing the significant financial details of the Subsidiaries is set out as a part of the Annual Report. The members of Biocon Limited and the subsidiary companies can write to the Company for obtaining the annual accounts of the subsidiary companies and the copies of annual accounts of all subsidiary companies will be kept for inspection at the registered office of the Company.

Capital Structure During the ﬁnancial year under review, the share capital of your Company remained unaltered.

Employees Stock Option Plan (ESOP) No new options were granted under this plan for the year under review.

Corporate Governance We strive to attain high standards of corporate governance while interacting with all our stakeholders. The Company has complied with the corporate governance code as stipulated under the listing agreement with the stock exchanges. A separate section on corporate governance along with a certiﬁcate from the auditors conﬁrming the level of compliance is annexed and forms a part of the Directors' report.

Directors Mr. JMM Shaw and Prof. Ravi Mazumdar retire by rotation at the ensuing Annual General Meeting, and being eligible, offer themselves for re-appointment.

Auditors The Statutory Auditors, M/s. S. R. Batliboi & Associates, Chartered Accountants, Bangalore, retire at the ensuing Annual General Meeting, and have conﬁrmed their eligibility and willingness to accept ofﬁce, if re-appointed.

The Auditors have reported that the Company is in process of updating the quantitative records for certain ﬁxed assets and the same have been since updated. With regard to the report of Auditors on non-payment of entry tax, the Management is of the view, that the entry tax is not payable as the Company has been sanctioned exemption under Millennium Biotech Policy from payment of entry tax.

Biocon Annual Report 2006 Financials 5153 Management Discussion and Analysis Report The report as required under the Listing agreements with the Stock Exchanges is annexed and forms part of the Directors' Report.

Cumulative disclosure under the stock option scheme as on 31st March 2006 Disclosure of the particulars of stock options schemes as on the above date, as per SEBI guidelines:

Particulars First Grant Second Grant Third Grant a. Options Granted (Net of options cancelled) 3,401,845 140,630 379,500 b. Exercise price (Post Equity Share split and bonus) Rs 0.2 Rs 5 each Rs 315 each c. Options vested 3,401,845 68,355 177,375 d. Options exercised 2,512,273 66,885 11,375 e. Total number of Equity Shares to be transferred from the ESOP Trust as a result of exercise of options 2,512,273 66,885 - f. Options lapsed 64,280 8,575 34,750 g. Variation in the terms of options NA NA NA h. Money realized by exercise of options Rs 512,955 Rs 159,250 Rs 3,583,125 i. Option pending exercise 825,307 1,470 161,875 j. Total number of options in force - 63,700 171,500 k. Person-wise details of options granted to: i. Directors and key managerial employees Please see Table (1) below for details regarding options Nil Nil granted to Directors and key managerial employees ii. any other employee who received a grant in any one year amounting to 5%or more of the options granted Nil Nil Nil during that year

iii. Identified employees who have been granted options during any one year equal to or exceeding 1% of the issued capital (excluding outstanding warrants Nil Nil Nil and conversions) of the Company at the time of grant l. Diluted Earning Per Share (EPS) pursuant to issue of Not applicable since shares Not applicable since shares will Not applicable since shares shares on exercise of options will be transferred by the be transferred by the ESOP will be transferred by the ESOP Trust upon exercise of Trust upon exercise of the ESOP Trust upon exercise of the options and the Company options and the Company will the options and the will not be required to issue not be required to issue any Company will not be any new shares new shares required to issue any new shares m. Vesting schedule 25% each in April of 2003, 25% each in January of 2005, 25% each in April of 2005, 2004, 2005 and 2006. 2006, 2007 and 2008. 2006, 2007 and 2008. n. Lock-in No lock-in, subject to a No lock-in, subject to a No lock-in, subject to a minimum vesting period of minimum vesting period of minimum vesting period of 1 year. 1 year. 1 year. Biocon Limited

Table (1) Details regarding options granted to Directors and key managerial employees are provided below:

Sl. No. Name of Director or key managerial Number of Equity Shares of personnel Rs 5 each issuable upon exercise of options Directors 1 Dr. Neville Bain 195,902 2 Prof. Charles Cooney 195,902

Key managerial employees 3 Mr. Ajay Bhardwaj 195,902 4 Dr. Arun Chandavarkar 195,902 5 Mr. Shrikumar Suryanarayanan 195,902 6 Mr. Murali Krishnan K N 195,902 7 Dr. Goutam Das 195,902 8 Mr. Rakesh Bamzai 122,439 9 Mr. Chinappa M B 122,439

Scientific Advisory Board The Scientific Advisory Board under the chairmanship of Prof. Charles Cooney met twice during the year under review. The Board has played an important role in evaluating and steering the Company’s R&D programs in a pragmatic manner. During the year under review the term of the First Scientific Advisory Board had come an end and the Second Scientific Advisory Board was constituted under the Chairmanship of Prof. Charles Cooney.

Fixed Deposits We have not accepted any ﬁxed deposits during the ﬁnancial year under review.

Directors’ responsibility statement Pursuant to Section 217(2AA) of the Companies Act, 1956, the Board of Directors hereby confirm as under: i) In preparation of annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures, if any; ii) We have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit of the Company for that period; iii) We have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities; iv) We have prepared the annual accounts on a going concern basis.

Particulars of Research and Development, Conservation of energy, Technology absorption etc Particulars required under Section 217 (1) (e) of the Companies Act, 1956 read with Rule 2 of the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 is given in the annexure to the Report.

Particulars of employees The information required to be furnished under section 217 (2A) of the Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975, as amended, is annexed and is a part of this report.

Acknowledgements Your Directors greatly appreciate the commitment and dedication of all the employees at all levels who have contributed to the growth and success of the Company. We would also thank all our clients, vendors, investors, bankers and other business associates for their continued support and encouragement during the year.

Your Directors thank the Government of India, Government of Karnataka, Ministry of Commerce and Industry, Ministry of Finance, Ministry of Information technology and Biotechnology, Customs and Excise Department, Income Tax Department, CSEZ and all other Government agencies for their support during the year and look forward to their continued support in the future.

For and on behalf of the Board

Kiran Mazumdar-Shaw Chairman and Managing Director April 20, 2006

Biocon Annual Report 2006 Financials 5155 MANAGEMENT’S DISCUSSION AND ANALYSIS

(All amounts in Indian Rupees thousands, except share data including share price)

1. Industry Structure and Development The global pharmaceutical sales continued to grow at 7 percent at constant exchange rates in 2005, to cross a record USD 600 billion. The top ten pharmaceutical markets continued to account for more than 80 percent of the total global pharmaceutical market, but emerging markets including China, Korea, Mexico, Russia and Turkey, all experienced double-digit growth, outpacing global performance and signaling important shifts in the marketplace. In terms of regional performance, North America, which accounts for 47 percent of global pharmaceutical sales, grew 5 percent, to USD 266 billion, while Europe experienced a higher growth of 7 percent, to USD 170 billion. Sales in Latin America grew 19 percent to USD 24 billion, while Asia Pacific (outside of Japan) and Africa grew 11 percent to USD 46 billion. Japan, the world’s second largest market, grew 7 percent to USD 60 billion. The Indian market grew by 9% to USD 5 billion in 2005. The world-wide pharmaceutical market is expected to grow by 5-8 percent over the next five years. North America and Europe are each projected to grow at a 5-8 percent pace; Asia Pacific/Africa, 9-12 percent; Latin America, 7-10 percent; and Japan, 3-6 percent.

Treatments for hypercholesterolaemia remained the top selling therapy class in 2005, with sales of USD 33 billion, followed by anti- ulcerants. Overall, cardiovascular and central nervous system treatments continued to dominate, with antidepressants maintaining the third ranking in the face of lower growth (owing to generic competition).

Oncology projects accounted for almost 30 percent of the total industry R&D pipeline in 2005, and it is expected that the cancer market will be worth more than USD 40 billion by 2008, driven by an ageing population, better diagnostics, and the introduction of further innovative products that have many years of patent protection ahead of them.

The number of blockbuster products exceeding one billion dollar annual sales reached 94 in 2005 compared with 36 in 2000 and included 17 new members of the billion-dollar club. Atorvastatin remained the top selling drug with annual sales in excess of USD 12 billion in 2005.

The biopharmaceutical market has undergone rapid expansion since its emergence thirty years ago. The 2005 bio-pharma market is estimated at USD 71 billion, having grown 17 percent from 2004’s revenues of USD 60.7 billion and the double-digit growth of the market is expected to continue to the end of the decade. The bio-pharma market by 2010 is expected to represent 17 percent of all prescriptions written compared with 2004’s 12 percent.

Generic Pharmaceutical Industry The generic drugs market refers to regulated markets for drugs whose patents have expired or been invalidated. The expiration or invalidation of product patents typically leads to the entry of generic, or non-branded, formulations in the regulated markets, resulting in increased competition and leading to a decline in price and margin of drugs.

Generics will assume a more central role as patients bear a greater percentage of their healthcare costs and payers seek to restrict the growth of healthcare expenditures. In 2005 sales of generics in the top eight markets (U.S., Canada, France, Germany, Italy, Spain, U.K. and Japan) exceeded USD 55 billion, and are expected to experience double-digit growth over the next ﬁve years with Patents on a number of signiﬁcant pharmaceutical products expected to expire in the next several years. Low cost producers such as India and China are expected to play a key role in the development of the generics industry.

2. Outlook The global pharmaceutical industry is forecasted to grow at 5-8% compounded annual growth rate through 2009. Growth will be mainly driven by the emergence of new markets including Asia, Easter Europe and Latin America, as well as ageing populations, innovative medicines and rising demand for higher quality of life. The generic industry is expected to grow significantly over the next few years with an estimated USD 100 billion worth of branded pharmaceutical products expected to go off patent by 2010 of which, an estimated USD 21 billion due to expire in 2006. Medicare reform and prescription drug benefit is also expected to have a favorable impact on the generic drug industry. In addition the EU has recently finalised its policy and legal framework for so-called bio-similars, opening the EU market for generic versions of biotechnology-derived drugs.

3. Opportunities The surge in generics together with patent expiry of Simvastatin, and Pravastatin in USA provides Biocon with attractive opportunities in the near to medium term. Supply of Insulin to Innovator Companies, Patent expiry of key immunosuppressant drugs and the opening up of bio-similars is also seen as large opportunities. Success in Biocon’s Research and Development initiatives into new drug discovery could also yield signiﬁcant beneﬁts. Biocon Limited

4. Risks & Concern The Generic Industry is subject to patent litigation and regulatory issues. Patent challenges or delay in receipt of regulatory approvals could delay our product launch in key markets. In addition signiﬁcant additional competition in key products could erode our market shares and result in reduced prices and proﬁtability. The consolidation of the generic industry could result in larger generic players acquiring manufacturing capabilities thereby reducing the market for third party manufacturers. The failure to obtain regulatory approval for new drugs under development could affect long term business opportunities. Other key risks related to our business include loss of key personnel, increase in input costs and strengthening of the Indian Rupee against key transactional currencies.

The Company carries out a detailed Risk Management exercise for purposes of identiﬁcation of risks and putting in place processes and controls to mitigate these risks. The audit committee reviews the Company’s risk management framework and approves risk management action plans.

5. Internal Controls Biocon has well established internal control systems for operations of the Company and its subsidiaries. The Finance Department is well staffed with experienced and qualiﬁed personnel who play an important role in implementing and monitoring the internal control environment and compliance with statutory requirements.

The Internal Audit is conducted by an independent ﬁrm of Chartered Accountants.

The Audit committee addresses signiﬁcant issues raised by the Internal & Statutory Auditors.

6. Human Resources Biocon recognizes that nurturing and recruiting the best talent is vital to the long term success of the enterprise. Employees are provided with continuous opportunities for active learning and development which are viewed as key drivers of their personal growth and the success of Biocon. The remuneration structure links rewards directly with performance. This performance management system reinforces our work ethics. All employees also participate in the Employee Stock Option Plan and about 13% of the Company is owned by Employees and a Trust formed for the beneﬁt of Employees.

The total employee strength of the Company and its subsidiaries at end of the ﬁnancial year 2005-06 was 1,839 as against 1,378 at the end of the previous ﬁnancial year.

7. Cautionary statement The statements made in this report and those appearing elsewhere, may be “forward looking statements” that set forth anticipated results based on management plans and assumptions. These statements are likely to address the Company’s growth strategy, ﬁnancial results, product development, product approvals, product potential and development programs. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Among the factors that could cause actual results to differ materially are: a. success of our research and development initiatives ; b. the impact of existing and future regulatory provisions on product exclusivity ; c. competitive developments affecting our product portfolio ; d. interest rate and foreign currency exchange rate ﬂuctuations ; e. statutory legislations and regulations affecting domestic and foreign operations, including tax obligations ; and other allied factors

Biocon Annual Report 2006 Financials 5157 8. Discussion on ﬁnancial performance with respect of operational performance Overview The ﬁnancial statements have been prepared in compliance with the requirements of the Companies Act, 1956 and Generally Accepted Accounting Principles (GAAP) in India.

BALANCE SHEET - MARCH 31, 2006 2006 2005 % SOURCES OF FUNDS Shareholder's Funds Share Capital 500,000 500,000 0% Reserves and Surplus 7,530,435 6,459,384 16.6% 8,030,435 6,959,384 15.4%

Loan Funds Secured loans 677,549 493,279 37.4% Unsecured loans 372,927 270,136 38.1% 1,050,476 763,415 37.6%

Deferred Tax Liability 279,738 219,597 27.4% 9,360,649 7,942,396 17.9%

APPLICATION OF FUNDS Fixed Assets Cost 3,161,061 2,702,017 17.0% Less: Accumulated depreciation 882,938 653,721 35.1% Net book value 2,278,123 2,048,296 11.2% Capital work-in-progress 4,564,301 3,100,026 47.2% 6,842,424 5,148,322 32.9% Investments 1,390,554 2,430,048 -42.8%

Current Assets, Loans and Advances Inventories 1,053,083 712,922 47.7% Sundry debtors 2,060,369 1,728,842 19.2% Cash and bank balances 20,035 34,201 -41.4% Loans and advances 212,135 170,142 24.7% 3,345,622 2,646,107 26.4% Less : Current Liabilities and Provisions 2,217,951 2,282,081 -2.8% Net Current Assets 1,127,671 364,026 209.8%

9,360,649 7,942,396 17.9%

Share Capital 2006 2005 Nos. Amount Nos. Amount Balance at the beginning of the year 100,000,000 500,000 100,000,000 500,000 Share issued during the year Nil Nil Nil Nil Balance at the end of the year 100,000,000 500,000 100,000,000 500,000

The Company has only one class of shares viz. equity shares of par value of Rs 5 each. The authorized share capital of the Company was raised from Rs 20,000 in 2002-03 to Rs 600,000 in 2003-04 represented by 120,000,000 equity shares of Rs 5 each.

The Company carried out a sub-division of equity shares of face value of Rs 10 each into 2 equity shares of Rs 5 each. Consequently, the issued, subscribed and paid -up capital of Rs 18,377 has been divided into 3,675,300 shares of Rs 5 each.

The Company in 2003-04 issued 86,324,700 equity shares of Rs 5 each as bonus shares in the ratio of 23.4877958 shares for every one share held to the shareholders existing as on November 11, 2003, which was the approved record date for this purpose, by capitalisation of the balance in the proﬁt and loss account of Rs 431,624.

In March 2004, the Company made an IPO of 10,000,000 fresh equity shares of Rs 5 each at a price of Rs 315 per share. Biocon Limited

Reserves and surplus The total reserves and surplus has increased from Rs 6,459,384 in March 31, 2005 to Rs 7,530,435 in March 31, 2006. The increase has been on account of Rs 1,334,830 proﬁts made during the year and adjusted for dividend payout of Rs 285,063 inclusive of Dividend distribution tax.

Loan funds There has been an increase in the loans outstanding from Rs 763,415 in March 2005 to Rs 1,050,476 in March 2006. The borrowings from banks increased by Rs 184,270 for funding working capital requirements. The unsecured loans increased by Rs 102,791 on account of accumulation of interest free deferred sales tax liability in respect of sales made during the year. The sales tax liability is payable after a period of 1-6 years as per an order obtained from Karnataka Commercial Tax Authorities.

Fixed Assets 2006 2005 % Cost 3,161,061 2,702,017 17.0% Less : Accumulated depreciation 882,938 653,721 35.1% Net Block 2,278,123 2,048,296 11.2% Asset turnover ratio (net) 2.17 2.39 Add : capital work in progress 7,530,435 3,100,026 142.9% Net ﬁxed assets 9,808,558 5,148,322 90.5%

During the year, the Company added Rs 459,044 to its gross block mainly on account of setting up a cell culture laboratory and an additional immunosuppressant facility. Additions include Research and Development equipment of Rs 197,241.

The capital work in progress as at March 31, 2006 represents advances paid towards acquisition of ﬁxed assets and the cost of assets not put to use. It includes the cost of our new project to augment our capacities for submerged fermentation and chemical synthesis operations at our proposed site at ‘Biocon Park’, Plot No. 2 & 3, IV Phase, Bommasandra – Jigani Link Road, Bangalore.

The Company has a capital commitment of Rs 336,041 as at March 31, 2006 as compared to Rs 982,897 as of March 31, 2005. Capital commitment as at March 31, 2006 mainly pertains to the new project referred to above.

Investments The Company as at March 31, 2006 held investments of Rs 1,390,554 as compared to Rs 2,430,048 as of March 31, 2005. The decrease in investments to the extent of 42.8% is mainly on account of utilization of short term investments in the ongoing capex program for the proposed submerged fermentation facility. Additional investments during the year include acquisition of 2,244,000 shares by the Company in BBPL, a joint venture Company with CIMAB SA, investment of Rs 182,308 in convertible promissory notes of Nobex Corporation, USA, Rs 87,195 in convertible promissory notes of Vaccinex Inc, USA. Investments also comprise Intercorporate deposits of Rs 261,625 with subsidiary Company Clinigene, and Rs 461,197 with BBPL, advance towards equity in BBPL of Rs 22,440 and Rs 66,627 advance made to Nobex Corporation USA.

The Company continues to hold investments in 2 wholly owned subsidiaries viz., Syngene and Clinigene of Rs 84,328 and Rs 500 respectively.

Current assets, loans and advances The current assets, loans and advances have increased from Rs 2,646,107 to Rs 3,345,622 representing an increase of 26.4% over the previous year. This was mainly on account of increase in inventories from Rs 712,922 to Rs 1,053,083 represented by rawmaterials and semiﬁnished goods which rose by Rs 121,585 and Rs 161,899 as compared to the previous year. These include trial run inventories of Rs 158,134 located at the proposed new facility. Sundry debtors stood at 2,060,369 (net of provision for doubtful debts of Rs 19,785) as at March 31, 2006 as compared to Rs 1,728,842 (net of provision for doubtful debts of Rs 17,207) as at March 31, 2005. These debtors are considered good and realisable. Provision for doubtful receivables as on March 31, 2006 has been made for debtors overdue for more than 180 days subject to review of collectibility of speciﬁc dues. Debtors represent an outstanding of 85 days and 73 days of gross sales revenue as at March 31, 2006 and March 31, 2005 respectively on a moving average of 3 months sales.

Provision for doubtful debts and bad debts written off represent 0.04% and 0.04% of gross sales for the year ended March 31, 2006 and March 31, 2005 respectively.

Loans and advances has increased from Rs 170,142 in March 31, 2005 to Rs 212,135 in March 31, 2006. This increase of 24.7% is mainly on account of increase in balances with customs, excise and sales tax authorities, which increased from Rs 72,973 as at March 31, 2005 to Rs 110,085 as at March 31, 2006.

Biocon Annual Report 2006 Financials 5159 Current liabilities and provisions The current liabilities and provisions stood at Rs 2,217,951 as at March 31, 2006 as compared to Rs 2,282,081 as of March 31, 2005. Sundry creditor balances for capital expenditure reduced from Rs 987,126 as at March 31, 2005 to Rs 676,527 as of March 31, 2006. Credit terms for supply of raw materials increased from 89 days as at March 31, 2005 to 116 days as at March 31, 2006 based on a moving average of 4 month’s purchases. Other liabilities including provision for expenses, increased from Rs 83,107 as at March 31, 2005 to Rs 134,434 as at March 31, 2006.

The Company has also proposed a dividend of Rs 250,000 (50%) for the year ended March 31, 2006 as against Rs 200,000 (40%) in the previous year.

Revenues

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2006 2006 2005 % INCOME Gross sales 7,246,713 6,842,047 5.9% Less : Excise duty 371,789 378,423 -1.8% Net sales 6,874,924 6,463,624 6.4% Contract research fees - 1,474 -100.0% Other income 56,911 156,513 -63.6% 6,931,835 6,621,611 4.7%

EXPENDITURE Material costs 3,790,109 3,441,546 10.1% Employee costs 420,600 420,435 0% Operating and other expenses 867,009 673,689 28.7% Interest and ﬁnance charges 16,887 19,931 -15.3% 5,094,605 4,555,601 11.8%

PROFIT BEFORE DEPRECIATION AND TAXES 1,837,230 2,066,010 -11.1% Depreciation 230,102 182,521 26.1% Less : Amount transferred from revaluation reserve 1,606 1,606 0% 228,496 180,915 26.3% PROFIT BEFORE TAXES 1,608,734 1,885,095 -14.7% Provision for income-tax - Current tax 208,633 98,298 112.2% - Deferred tax 60,141 42,917 40.1% - Fringe beneﬁt tax 5,130 - NET PROFIT FOR THE YEAR 1,334,830 1,743,880 -23.5% Balance brought forward from the previous year 2,385,167 1,043,725 PROFIT AVAILABLE FOR APPROPRIATION 3,719,997 2,787,605 Proposed dividend on equity shares 250,000 200,000 Tax on proposed dividend 35,063 28,050 Transfer to general reserve 133,483 174,388 BALANCE, END OF THE YEAR 3,301,451 2,385,167

Biocon’s total income has four components: • Sales of Biopharmaceuticals products; • Sales of Enzymes products; • Research fees; and • Other income. Biocon Limited

The following table sets out the contribution of each of these components of Biocon’s income expressed as a percentage of Biocon’s total income for the years ended March 31, 2006 and March 31, 2005:

Sales 2006 2005 Sale of Products Biopharmaceuticals 86.9% 84.1% Enzymes 12.3% 13.5% Research fees - 0.1% Other Income 0.8% 2.3% Total Income 100.0% 100.0%

Share of revenues from net sales between domestic and export markets are as follows: Share of revenues 2006 % 2005 %

Domestic 3,297,693 48.0% 2,702,140 41.8% Exports 3,577,231 52.0% 3,761,484 58.2% Total 6,874,924 100.0% 6,463,624 100.0%

Biocon’s net sales grew by 6.4% to Rs 6,874,924 in 2005-06 while the total income grew by 4.7% to Rs 6,931,835. The Company’s export revenues from product sales have reduced by 4.9% and domestic sales have increased by 22% mainly driven by revenues from sale of bio-pharmaceutical products.

Revenues from sale of biopharmaceuticals registered a growth of 8.2% in March 31, 2006 over March 31, 2005, while the enzymes segment registered a decline of 5.3% over the same period.

Segment and product-wise performance The segmentation of Biocon’s sales is as follows: 2006 % 2005 % Biopharmaceuticals 6,025,361 87.6% 5,566,810 86.1% Enzymes 849,563 12.4% 896,814 13.9% Total 6,874,924 100.0% 6,463,624 100.0%

Bio-pharmaceuticals In pharma, we focus on the manufacture and marketing of APIs that require fermentation and other skills and that offer large market potential. Having begun sales in ﬁscal 1998, our biopharmaceuticals business has since grown to constitute 87.6% & 86.7% of our sales in 2005-06 and 2004-05 respectively.

(a) Statins Statins are cholesterol-lowering agents used to treat and prevent coronary diseases and are amongst the largest selling drugs worldwide. The Company’s statins portfolio presently comprises lovastatin, simvastatin, pravastatin and atorvastatin. Biocon is currently exporting simvastatin to Europe, Japan and Canada, lovastatin to the U.S. and pravastatin to the European markets. The Company has over the years been facing severe pricing pressure in this segment due to increased competitor penetration.

The US patent expiry for Simvastatin and Pravastatin in fiscal 2007 is expected to be a key growth driver in the next couple of years. Our existing facilities have been qualified by US FDA. In addition we have initiated a capacity expansion plan to significantly increase our lovastatin, simvastatin, pravastatin and atorvastatin production. We expect this capacity to be available in fiscal 2007.

(b) Immunosuppressants Immunosuppressants prevent organ and tissue rejection in transplants and require high technology based manufacturing capabilities. Currently Biocon produces mycophenolate mofetil (MMF), sirolimus and tacrolimus. MMF and tacrolimus are sold largely in the domestic market and certain semi-regulated export markets. Biocon is positioning itself to enter new segments and address regulated exports markets aggressively in future. Biocon has ﬁled a DMF for MMF and tacrolimus to address the US markets following patent expiry.

(c) Other biopharmaceutical products Biocon also supplies a range of other Biopharmaceutical products. Biocon markets recombinant human insulin in India under its own brand name ‘Insugen’ and is also registering Insulin in several semi-regulated export markets to address a signiﬁcant export opportunity. In addition Biocon has a supply arrangement with two pharmaceutical companies to supply recombinant human insulin for use in their novel formulation which is presently undergoing clinical trials.

Our other target products include Orlistat (anti obesity) and Everolimus (Immunosuppressant).

(d) Sale Of Formulations Started in the second half of the last fiscal year, Biocon also has a dedicated marketing team for finished formulations. The segment, though in the nascent stage, has been growing rapidly in the last one year of operations. With a focus on the anti-diabetic and cardiovascular market, Biocon's own insulin brand 'Insugen' is also marketed by the formulation team. The formulation segment currently has a team which comprises of field staff spread across the country, with sales registering an impressive growth in FY 2006 as compared to FY 2005. Biocon Annual Report 2006 Financials 5161 Enzymes Biocon develops and markets a mix of specialty and industrial enzymes for a broad range of industries including food and beverages, brewing and distilling, textiles and paper. The enzymes business registered a decline of 5.3% from Rs 896,814 to Rs 849,563 driven by lower sales of enzymes for the food, beverage and brewing and distilling industries owing to capacity constraints.

Other Income Other income consists primarily of dividend income and interest income on surplus funds invested in short term money market instruments. Dividend income at Rs 21,508 in 2005-06 was lower than in 2004-05 due to the deployment of funds in the ongoing capital expenditure program at Biocon Park.

Material costs Material costs includes Biocon’s consumption of raw materials and traded goods and increases or decreases in stock. Raw materials costs with respect to the products have increased by 10.1% over the previous year largely on account of a 6.4% increase in sales. Raw material costs as a percentage of sales have increased by 1.9% mainly on account of reduction in selling prices of some key statins. Raw material costs are to a lesser extent dependent on global petrochemical prices, which in turn often track global oil prices. This is because our biopharmaceutical and enzyme production processes involve the use of many petrochemicals, especially solvents such as ethyl acetate, methyl iodide and acetone.

Employee costs Staff cost comprises • salaries, wages, allowances and bonuses; • contributions to provident fund; • contributions to superannuation, gratuity and leave encashment; and • welfare expenses (including employee insurance schemes, school tuition program and other miscellaneous employee beneﬁts)

Staff costs were Rs 420,435 and Rs 420,600 for the fiscal years ended 2005 and 2006 respectively. The total number of our full-time employees has grown from 945 at the beginning of fiscal 2006 to 1,225 at the end of fiscal 2006.

Operating and other expenses Operating and other expenses comprise of rent; travelling and conveyance; communication; professional charges; power and fuel; patent fees; consumables; repairs and maintenance; general expenses; freight outwards; sales promotion; commissions; bad debts write off; provisions for bad and doubtful debts; printing and stationary; insurance; rates, taxes and fees; and losses on sales of assets. Operating and other expenses have increased by 28.7% from Rs 673,689 for the year ended March 31, 2005 to Rs 867,009 for the year ended March 31, 2006.

This is mainly on account of the following:

• Rs 61,857 increase in power and fuel costs on account of increase in production activity and increase in fuel tariff. • Exchange loss of Rs 3,257 as against an exchange gain of Rs 29,960. • Rs 430,018 increase in research and development expenses on account of increase in our ongoing research initiatives including the oral insulin project. • Rs 38,910 increase in selling costs, mainly commission costs corresponds to the increase in sales. Commission as a percentage of sales has gone up from 0.82% in ﬁscal 2005 to 0.87% in ﬁscal 2006.

Interest and Finance Charges Interest and finance charges have reduced from Rs 19,931 in fiscal 2005 to Rs 16,887 in fiscal 2006.

Depreciation During the year depreciation has increased by Rs 47,581 amounting to an increase of 26.3% over fiscal 2005 on account of depreciation charge for full year on additions made to fixed assets in the previous year. This cost as a percentage of sales has also increased from 2.8 % in fiscal 2005 to 3.3% in fiscal 2006.

Provision for Taxes Provision for current, fringe benefits and deferred taxes in the year ended March 31, 2006 was Rs 273,904, compared with Rs 141,215 in fiscal 2005. The increase in effective rate from 7.5 % of profit before tax in fiscal 2005 to 16.7% of profit before tax in fiscal 2006 is on account of lower income from 100% Export Oriented Units. During the year there was an additional impact of Rs 5,130 on account of fringe benefit tax.

Net Profit Net profit, for fiscal year 2006 decreased by 23.5% to Rs 1,334,830 resulting in an EPS of Rs 13.97. Increased pricing pressures have impacted the net margins, which were lower by 708 basis points at 19.3%. Biocon Limited

Liquidity Our primary liquidity needs have been to ﬁnance our working capital requirements and our capital expenditures. These costs have been funded principally by cash ﬂows from operations and short term borrowings. The Company has during the year, utilized the IPO funds deployed in short term money market instruments to fund its capital expenditure.

2006 2005 Net cash generated from operating activities 403,884 1,409,575 Net cash used for investing activities (483,034) (4,536,536) Net cash generated from / (Used) in ﬁnancing activities 47,410 (18,410) Net increase / (decrease) in cash and cash equivalents (31,740) (3,145,371)

As of March 31, 2006, cash and cash equivalents amounted to Rs 20,035. The principal source of cash and cash equivalents in fiscal 2006 from cash flows from operations amounting to Rs 403,884. Cash flows from operations were mainly used for purchase of fixed assets of Rs 1,570,824.

Operating activities Net Cash flows from operating activities for fiscal 2006 decreased by 74.0% over fiscal 2005 due to lower operating income and increased investment in working capital.

Investing activities The Company‘s net cash ﬂows used for investing activities were used primarily to fund purchase of ﬁxed assets for its new facility at Biocon Park.

Financing activities The net cash ﬂows from ﬁnancing activities increased on account of proceeds from short term borrowings from banks to fund working capital requirements.

PERFORMANCE OF SUBSIDIARIES

Syngene International Private Limited Syngene is a 99.99% owned subsidiary of Biocon Limited. Syngene was incorporated on November 18, 1993 and is involved in two main research areas: Synthetic chemistry and molecular biology. Syngene is also involved in custom chemical synthesis.

Syngene’s total income consists of net sales from contract research services, with the remainder consisting largely of net sales of compounds. Substantially all of Syngene’s contracts are based on time and material management. Revenue from these contracts are recognised as services are rendered, in accordance with the terms of the contract. Syngene’s total revenue has increased from Rs 660,656 to Rs 981,730 representing an increase of 48.6%. This growth in revenue has been the result of growth in the number of clients. In addition, Syngene also earned Rs 14,003 from investment of its surplus funds in mutual fund units.

Most of Syngene’s expenses are comprised of raw-material costs and staff costs. Raw material cost consists of lab consumables used for research. Material cost increased by 55.8% over fiscal 2005 on account of increase in business activities. As a percentage of sales, material costs have increased by 1.0% primarily due to higher costs associated with the custom synthesis business. Syngene’s staff cost increased from fiscal 2005 on account of increase in number of employees. However, as a percentage of sales, this cost has declined by 2.2% due to higher realisation per scientist. Other costs grew by 45.5% mainly on account of power charges, which moved from Rs 8,909 in fiscal 2005 to Rs 28,247 in fiscal 2006.

Net profit for fiscal 2006 increased by 64.1% to Rs 452,107. Net margin has also improved from 41.7% in fiscal 2005 to 46.1% in fiscal 2005

Abbreviated profit and loss statement 2006 2005 Total Income 981,730 660,656 Profit before tax 483,618 320,307 PBT Margin 49.3% 48.5% Profit after tax 452,107 275,455 Net Margin 46.1% 41.7%

Syngene contributed 12.4% to the consolidated income and 26.0% to the consolidated proﬁts of the group during ﬁscal 2006.

In the previous year, Syngene contributed 9.1% and 13.9% to the consolidated income and proﬁts of the group respectively.

Clinigene International Private Limited Clinigene is a 100% owned subsidiary of Biocon Limited. Clinigene was incorporated on August 4, 2000 with an authorised share capital of Rs 5,000. Clinigene was established to undertake clinical trials and studies for validation of drugs and to conduct research in the area of medical sciences for development of new and improve upon existing medical diagnostic, surgical and therapeutic techniques.

Biocon Annual Report 2006 Financials 5163 Clinigene’s total income principally consists of income from clinical research fees and also Bio-analytical and Bio-equivalence studies. Clinigene enters either into time and material contracts and/or fixed price arrangements. Revenue from time and material contracts are recognised on a monthly basis as services are rendered in accordance with the terms of the applicable contracts. Revenue from fixed price contracts is recognised based on the percentage completion method. Total Income of Clinigene increased from Rs 14,095 in fiscal 2005 to Rs 56,580 in fiscal 2006, primarily driven by increase in clinical research fees.

Clinigene’s expenses comprise of research material costs, staff cost, other operating expense, interest cost and depreciation. Clinigene’s research material costs increased by 58.5%, whereas research material cost as a percentage of sales decreased to 12.7% from 32.3%. Clinigene’s staff cost has increased by 47.8%. This is because Clinigene is in the process of developing its clinical research capabilities and is hiring employees. Clinigene may require additional funds to develop its capabilities and become proﬁtable. Biocon Limited is supporting it in its funding. As at March 31, 2006, it has accumulated losses of Rs 62,758.

Loss for the year ended March 31, 2006 of Rs 11,109 has been consolidated with the proﬁts of the group in the consolidated ﬁnancial statements.

Biocon Biopharamaceuticals Private Limited BBPL is a joint venture Company and currently 51% of its shares are held by Biocon and the balance 49% by CIMAB SA, Cuba. BBPL was incorporated on June 17, 2002 with an authorised share capital of Rs 500 and in the year 2004 increased to Rs.10,000 which has in the current year been increased to Rs 132,000. BBPL has been established to produce and sell certain biologicals. BBPL is yet to commence commercial operations and is in the process of setting up its facilities. Biocon holds 4,488,000 equity shares and CIMAB holds 4,312,000 equity shares of Rs.10 each respectively. In addition, Biocon has also made an advance towards issue of 2,244,000 shares.

As at March 31, 2006, BBPL has accumulated losses of Rs 66,373. Biocon’s share in the accumulated losses of BBPL aggregates Rs 33,850.

Consolidated financial statements Biocon has prepared consolidated financials in accordance with Indian GAAP and US GAAP by consolidating its subsidiaries - Syngene and Clinigene and Joint Venture Company BBPL. The abbreviated consolidated Indian GAAP and US GAAP profit and loss account is as under :

Abbreviated consolidated proﬁt and loss statement - Indian GAAP

2006 2005 Total Income 7,932,126 7,281,911 Proﬁt before tax (PBT) 2,025,489 2,151,102 PBT margin 25.5% 29.5% PAT after minority interest 1,739,523 1,975,449 Net margin 21.9% 27.1%

Abbreviated consolidated proﬁt and loss statement - US GAAP

2006 2005 Total Revenue 7,880,680 7,125,664 Gross proﬁt 3,199,397 2,876,090 Gross proﬁt margin 40.6% 40.4% Income from operations 2,032,857 2,033,145 Income before income taxes (IBT) 2,028,710 2,166,259 IBT margin 25.7% 30.4% Net Income 1,676,676 1,918,830 Net Income Margin 21.3% 26.9%

Reconciliation of Indian and US GAAP consolidated ﬁnancial statements

2006 2005 Net proﬁt as per Indian GAAP 1,739,523 1,975,449 Depreciation 3,449 3,234 Deferred taxes (52,233) (61,347) Leave encashment / Gratuity provision as per FAS 7 5,625 11,923 Additional losses of JV (19,688) (10,429)

Net Income as per US GAAP 1,676,676 1,918,830 Biocon Limited

ANNEXURE TO DIRECTORS' REPORT

Statement pursuant to Section 217 (2A) of the Companies Act, 1956 & Companies (Particulars of Employees) Rules, 1975

Details of Remuneration paid during the year ended March 31, 2006 Sl.No. Name & Age Remuneration Qualiﬁcation & Experience Date of Commencement Last Designation Rs of employment employment 1 Mr. Ajay Bhardwaj 46 9,934,387 M.S (Chemical Engineering) 1-Jan-86 Project Engineer President - Group Marketing 22 Years Max India Ltd, New Delhi

2 Dr. Arun Chandavarkar 45 9,820,557 Ph.D (Chemical Engineering) 8-Nov-90 --- President - Operations & Technology 15 Years

3 Mr. Chinappa M B 38 3,833,371 B.Com., ACA 12-Jul-99 Finance Manager Vice President - Finance 13 years ITC Limited, Calcutta

4 Mr. J M M Shaw 57 9,383,800 M.A (Hons) 1-Apr-99 President- Vice Chairman 35 Years Berghaus International Fashion Group, Holland

5 Dr. Kiran Mazumdar Shaw 53 10,338,800 B.Sc (Hons) 1-Dec-78 Consultant Chairman & Managing Director PGD in Malting & Brewing Jupiter Breweries Ltd 31 Years

6 Mr. Malay Jiban Barua 38 2,658,200 M.Tech 1-Jun-95 -- Senior Manager - Marketing (Chemical technology) 11 Years

7 Mr. Murali Krishnan K N 50 9,893,547 B.Com., (C.A) 9-Nov-81 -- President - Group Finance 24 Years

8 Mr. Rakesh Bamzai 45 7,312,856 B.Sc 19-Apr-95 Asst. G.M. - Marketing President - Marketing (Food & Fermentation Tech) Advanced Biochemicals Ltd 17 Years

9 Mr. Sandeep Rao 32 3,625,982 M.Sc, PGDM 15-Jun-99 -- Manager - Marketing 7 Years

10 Mr. Shrikumar Suryanarayanan 46 9,952,355 M.Tech(Chemical Engineering) 2-May-84 -- President - Research & Development 22 Years

Note: 1. Remuneration shown above includes Salary, Allowances, Bonus (based on receipt), Company's contribution to P.F and other perquisites valued as per Income Tax Rules, 1962.

2. Nature of employment in all cases is contractual. Other terms and conditions are as per Company rules.

3. Dr. Kiran Mazumdar & Mr. JMM Shaw are the Directors of the Company and are related to each other. No other employee mentioned above is related to any Director of the Company.

On behalf of Board of Directors

Kiran Mazumdar Shaw Chairman & Managing Director

Bangalore April 20, 2006

Biocon Annual Report 2006 Financials 5165 ANNEXURE TO THE DIRECTORS REPORT

Particulars under Companies (Disclosure of particulars in the Report of Board of Directors) Rules, 1988 for the year ended March 31, 2006

Conservation of Energy During the year, the Company continued to undertake significant measures to reduce the energy consumption by using energy-efficient machines and equipment. The Company also undertakes evaluation of latest tehnology and invests in making its infrastructure more energy efficient.

FORM A For the year ended For the year ended 31st March, 2006 31st March, 2005 A. Power and Fuel Consumption

1. Electricity a. Electricity Purchased (‘000 Units) 14,441.84 3,967.00 Total Amount (Rs in Lakhs) 683.10 184.00 Rate per Unit (Rs) 4.73 4.64 b. Own Generation from Diesel Generator (‘000 Units) 27,064.61 27,959.27 Total Amount (Rs in Lakhs) 1,935.12 1,935.58 Rate per Unit (Rs) 7.15 6.92

2. Furnace Oil Unit (K.L) 2,563.92 2,416.43 Total Cost (Rs in Lakhs) 460.25 340.32 Average cost per K.L (Rs) 17,951.06 14,083.55

B. Consumption per unit of Production The disclosure of consumption ﬁgures per unit of production is not meaningful as the operations of the Company involves multiple products.

FORM B A. Speciﬁc areas in which R&D work has been carried out by the company - Process and Clinical Development of Novel Biotherapeutics in Oncology, Diabetes and Cardiovascular segments. - Process and Clinical Development of Biosimilars in Metabolic disorders, Diabetes and Cardiovascular segments. - Development of Synthetic and Fermentation based Generic Small Molecules for Cardio-vascular and Transplantation segments. - Generation of Intellectual Property Development – Process Patents for manufacture of key Generic Small Molecules and Biotherapeutics - Development of globally competitive manufacturing processes - Clinical Development of new drug combinations - Novel Enzyme Formulations for Food and Industrial Applications

B. Benefits derived as a result of R&D activities. - Scale-up of key Biosimilars with improved productivity and process efficiencies - Strategic collaborations for development of new Biotherapeutics - Global presence in supply of fermentation based Small Molecules to the Generic Industry in regulated markets - Rich Pipeline of Generic Small Molecules catering to varied therapeutic areas - Internationally competitive prices and product quality - Generation of high quality data compliant with International Regulatory requirements - Established intellectual property with 266 Patents/ PCT applications filed in Indian and International markets - Safe and environment friendly processes - Novel Enzyme Formulations marketed in the domestic and international markets

C. Future Plan of Action. - Greater importance in the research areas of New Drug Discovery - Clinical Development of existing pipeline of Biotherapeutics - Strategic Collaborations for increased speed and cost competitiveness in Drug Discovery - Continued emphasis on Monoclonal Antibodies and Biotherapeutics leveraging on Biocon’s in-house fermentation skills - Continue to strengthen R&D capabilities in the area of New Biotherapeutics – Monoclonal antibodies and Oral insulin Biocon Limited

4. Expenditure on scientiﬁc Research & Development (Rs In Million) 31.3.2006 31.3.2005 (a) Capital 215.6 103.4 (b) Recurring 185.2 137.5 (c) Total 400.7 240.9 (d) Total R& D expenditure as percentage of sales 5.8% 3.7%

In addtion, the Company has invested Rs 336.1 Million with its Research Collaboration Partners - Nobex Corporation, USA and Vaccinex Inc, USA

5. Technology Apsorption, Adaption and Innovation No imported technology during the year

6. Foreign Exchange earnings and outgo : Foreign exchange earned and used for the year ended 31st March, 2006, (Rs. in Million) 31.3.2006 31.3.2005 Gross Earnings 3,589.5 3,780.4 Outﬂow* 2,885.3 2,849.3 Net foreign exchange earnings 704.2 931.1

*For details please refer to information given in the notes to accounts to the annual accounts of the Company in Schedule 22 Notes to accounts item no. iv to vi.

SECTION 212 Statement pursuant to Section 212 of the Companies Act, 1956 relating to Holding Company's interest in the Subsidiary Companies Syngene International Clinigene International Biocon Biopharmaceuticals Private Limited Private Limited Private Limited

Financial year of the subsidiary ended on 31st March 2006 31st March 2006 31st March 2006

2. (a) Number of shares held by Biocon Limited at the end of the 28,74,830 equity 50,000 equity 44,88,000 equity above date shares of Rs 10/- each shares of RS. 10/- each shares of Rs 10/- each

(b) Extent of interest on above date 99.99% 100% 51%

3. Net aggregate amount of the Subsidiary Company's Proﬁt / (Loss) so far it concerns members of the Holding Company and

(a) is not dealt in the Company's account :

(i) for the ﬁnancial year ended 31 March, 2006 452,080 (11,109) (20,519)

(ii) for the previous ﬁnancial years, since it became a subsidiary 435,937 (47,784) (12,500)

(b) is dealt in the Company's account :

(i) for the ﬁnancial year ended 31 March, 2006 Nil Nil Nil

(ii) for the previous ﬁnancial years, since it became a subsidiary Nil Nil Nil

Biocon Annual Report 2006 Financials 5167 ANNEXURE TO DIRECTOR’S REPORT Corporate Governance Report

The detailed report on Corporate Governance for the ﬁnancial year from April 1, 2005 to March 31, 2006, as per the format prescribed by SEBI and incorporated in the revised Clause 49 of the Listing Agreement is set out below:

1. Company's Corporate Governance philosophy and compliance Biocon is committed to doing business in an efﬁcient, responsible, honest and ethical manner. Good Corporate Governance goes beyond compliance and involves a Company wide commitment. This commitment starts with the Board of Directors, which executes its corporate governance responsibilities by focusing on the Company's strategic and operational excellence and on the best interests of all our stakeholders, in particular shareholders, employees and our customers in a balanced fashion with long term beneﬁts to all.

The core values of the Company’s governance process include independence, integrity, accountability, transparency, responsibility and fairness. The Business policies are based on ethical conduct, health, safety and a commitment to building long term sustainable relationships.

Biocon is committed to continually evolving and adopting appropriate corporate governance best practices.

2. Board of Directors Composition: The Board of Directors comprises 7 members including two executive directors, five non- executive directors, of which four are independent directors. The Board believes that the current size is appropriate based on the Company size and circumstance and is appropriate mix of executive and independent directors to maintain the independency of the Board. Dr. Kiran Mazumdar-Shaw is the Chairman and Managing Director of the Company and Mr. JMM Shaw is the Vice-Chairman. Dr. Kiran Mazumdar-Shaw and Mr. JMM Shaw is responsible for the day to day management of the Company, subject to the supervision and control of the Board of Directors. The independent directors on the Board are scientists, professionals, technocrats who are senior, competent and highly respected persons from their respective fields. The brief profile of the Company's Board of Directors is as under:

Dr. Kiran Mazumdar-Shaw, 53 years, Chairman and Managing Director, is a first generation entrepreneur with more than 28 years’ experience in the field of biotechnology. After graduating in B.Sc. (Zoology Hons.) from Bangalore University in 1973, she completed her post-graduate degree in malting and brewing from Ballarat College, Melbourne University in 1975. She has received an Honorary Doctorate of Science, University of Ballarat, 2004 in recognition of her pre-eminent contribution to the field of Biotechnology. She is also awarded an Honorary Doctorate from the Manipal Academy of Higher Education (MAHE), in recognition of outstanding achievements in biotechnology and industrial enzymes, 2005. She is a founder promoter and has led the Company since its inception in 1978. She is currently the Director of Syngene International private Ltd, Clinigene International Private Ltd and Biocon Biopharmaceutical Private Ltd. She was previously a consultant with Jupiter Breweries Limited. She is the recipient of several awards, the most noteworthy being the ‘Padmabhushan’ Award (one of the highest civilian awards in India) in 2005 conferred by the President of India, the Ernst & Young Entrepreneur of the Year Award in 2002 for the Healthcare & Life Sciences category and more recently in 2003 the BioSpectrum Person of the Year Award. She heads several biotechnology task forces including the Karnataka Vision Group on Biotechnology, an initiative by the Government of Karnataka and the National Taskforce on Biotechnology for the Confederation of Indian Industry (CII).

Mr. JMM Shaw, 57 years, Vice Chairman, is a promoter and a whole-time director of the Company. He is also a controlling shareholder and director of Glentec International. He completed his M.A. (Economic Hons.) in History and Political Economy from Glasgow University, U.K. in 1970. He had 27 years’ experience with Coats Viyella plc. in various capacities including ﬁnance and general administration. He has served as Finance Director and Managing Director of Coats Viyella group companies in various locations around the world, before he came on the Board of Biocon Limited in 1999.

Dr. Neville Bain, 66 years, has vast experience in the field of finance, strategy and general management. He graduated from Otago University, New Zealand, with a Master of Commerce (Hons) degree and double Bachelor degrees in Accounting and Economics. He has also been awarded the degree of Doctor of Law, is a Fellow Chartered Accountant, a Fellow Cost and Management Accountant, a Fellow Chartered Secretary and a Fellow of the Institute of Directors. He spent 27 years with the Cadbury Schweppes group, having responsibility for the world-wide confectionery business and then as Deputy Chief Executive and Finance Director. This was followed by a six-year term as Chief Executive Officer of Coats Viyella plc, and then as Chairman and Director of various organisations. He is Chairman of the Institute of Directors, Director of Hogg Robinson plc, and also a board member of Scottish Newcastle plc. He has published books on Corporate Governance, Strategy, and the effective utilisation of people in organisations.

Prof. Charles L. Cooney, 61 years, is the Professor of Chemical & Biochemical Engineering, Faculty Director of the Deshpande Center for Technological Innovation and Co-Director of the Program on the Pharmaceutical Industry at the Massachusetts Institute of Technology (MIT), Cambridge, U.S.A. He obtained his Bachelor’s degree in Chemical Engineering from the University of Pennsylvania in 1966, his Master’s degree and his Ph.D in Biochemical Engineering from MIT in 1967 and 1970 respectively. His research interests Biocon Limited

span topics in biochemical engineering and pharmaceutical manufacturing. He is a recipient of several prestigious awards, including Gold Medal of the Institute of Biotechnology Studies (London), the Food, Pharmaceutical and Bioengineering Award from the American Institute of Chemical Engineers and the James Van Lanen Distinguished Service Award from the American Chemical Society. He serves as a consultant to and/or director of a number of biotech and pharmaceutical companies globally and is on the editorial boards of several professional journals.

Mr. Suresh Talwar, 67 years, is a partner of Crawford Bayley & Co., a reputed law ﬁrm in India. He completed his B.Com from the University of Bombay in 1959, his LL.B. from the Government Law College, Bombay in 1961 and a solicitor of the Incorporated Law Society, Mumbai in 1966. His area of professional specialisation is in corporate law and other related matters. He has been the legal counsel to numerous Indian companies, multinational corporations as well as Indian and foreign banks. He is also a director of several leading companies in India.

Prof. Ravi Mazumdar, 51 years, completed his Ph.D from the University of California, Los Angeles, USA in 1983. Prior to this, he obtained his B.Tech from the Indian Institute of Technology, Bombay in 1977 and his Masters in Science from the Imperial College of Science, London in 1978. He is a professor in University of Waterloo, Canada and has been profession in several prestigious universities including Purdue University, U.S.A Columbia University, U.S.A., University of Essex, U.K., Mc Gill University, Canada and the Indian Institute of Science, Bangalore. He has over 100 refereed publications in international journals in the area of applied probability and stochastic processes, non-linear dynamical systems, statistical signal processing, queuing theory and in the control and design of high- speed networks. He has been a member of several advisory committees and working groups, including the US Congress Sub- Committee on Science and Technology. He is a Fellow of the Royal Statistical Society and Fellow of the Institute of Electrical and Electronics Engineers, Inc. He is the younger brother of Dr. Kiran Mazumdar-Shaw.

Dr. Bala S. Manian, 61 years, has been a part of the Silicon Valley entrepreneurial community over the last three decades and is responsible for successfully starting several life science companies. Dr. Manian is a co-founder and director of Quantum Dot Corporation, and a co-founder of SurroMed Corporation. He was also chairman of Entigen Corporation, a Bioinformatics Company. He was the founder and Chairman of Biometric Imaging, Inc. Prior to founding Biometric Imaging, Inc., Dr. Manian founded Digital Optics Corporation an optical instrumentation and systems development Company in 1980 and two other Companies, Lumisys and Molecular Dynamics in June 1987. Dr Manian is presently the CEO of ReaMetrix Inc. An expert in the design of electro-optical systems, Dr. Manian holds more than 35 patents, many of which have resulted in successful commercial products. Additionally, Dr. Manian has authored more than 30 peer reviewed scientiﬁc publications. He has been recognized through several awards for his contributions as an educator, inventor and an entrepreneur. In February 1999 the Academy of Motion Picture Arts and Sciences awarded a Technical Academy Award to Dr. Manian for advances in digital cinematography. He has a B.S. in Physics from the University of Madras, a M.S. in Applied Optics from the University of Rochester, and a Ph.D. in mechanical engineering from Purdue University. He was a faculty member of the University of Rochester's Institute of Optics for four years, teaching courses in optical fabrication and testing, optical instrumentation and holography. At present he serves as a member of the Board of Trustees of University of Rochester.

In accordance with our Articles of Association, the Board can appoint an alternate Director pursuant to the provisions of the Companies Act. Prof. Catherine Rosenberg is presently the alternate Director to Prof. Ravi Mazumdar.

Status of Directors and other directorships: Statement showing the status of Directors as executive/non-executive and independent/ non-independent during the year is set out below:

Name of the Director Position/ Independent/ Relationship with No of other Executive / Non independent other directors Directorships (*) Non executive Dr. Kiran Mazumdar Shaw Chairman & M D Non independent Yes 4 Mr. JMM Shaw Vice Chairman Non independent Yes 4 Prof. Ravi Mazumdar Non Executive Non independent Yes 2 Dr. Neville Bain Non Executive Independent None 6 Prof. Charles Cooney Non Executive Independent None 3 Mr. Suresh Talwar Non Executive Independent None 50 Dr. Bala S Manian Non Executive Independent None 3

* Includes private limited companies and foreign body corporate and alternate directorships.

More than 50% of the Board comprises of non-executive Directors and more than half of the Board comprises of Independent Directors. The Company has obtained the necessary information from all the directors of the Company and performed the necessary steps to arrive at this conclusion.

Biocon Annual Report 2006 Financials 5169 Details of Directorships in other Companies The details of directorships of the Company’s Directors in other companies as on March 31, 2006 are given below: Name of Company/ Firm Nature of Interest Dr. Kiran Mazumdar-Shaw Syngene International Private Ltd Director Clinigene International private Ltd Director Biocon Biopharmaceuticals Private Ltd Director Export- Import Bank of India Non-ofﬁcial Director

Mr. J M M Shaw Syngene International Private Ltd Director Clinigene International private Ltd Director Biocon Biopharmaceuticals Private Ltd Director Glentec international Director

Prof. Ravi Mazumdar Syngene International Private Ltd Alternate Director Glentec International Director

Dr. Neville C Bain Hogg Robinson.Plc Director Farnborough Holdings Plc Director Scottish & Newcastle Plc Director Syngene International Private Ltd Director Neville Bain Developments Ltd. Director Provexis Ltd. Director

Prof. Charles Cooney Syngene International Private Ltd Director Genzyme Corporation Director Bio Processors Inc Director

Mr. Suresh N Talwar PZ Cussons India Pvt Ltd Chairman & Alterante Director FCI OEN Connectors Ltd. Chairman & Alterante Director Trans Warranty Finance Limited Chairman & Alterante Director Armstrong World Industries ( India) Ltd Chairman Moly Colloids Pvt Ltd Chairman Merck Ltd Chairman Romil Finance & Investments Pvt Ltd Chairman Sidham Finance and Investments Pvt Ltd Chairman 20th Century Fox Corpn (I) Pvt Ltd Chairman Aon Global Insurance Services Pvt Ltd Director Birla Sun Life Insurance Co Ltd Director Birla Sun Life Trustee Co Ltd Director Blue Star Ltd Director Blue Star Infotech Ltd Director Cadbury India Limited Director Carborundum Universal Ltd Director Cholamandalam MS General Insurance Co. Ltd Director Chowgule and Company Ltd Director Decagon Investments Pvt Ltd Director Emerson Process Management ( India) Pvt Ltd Director Epitome Global Serives Director Greaves Cotton Ltd Director India Value Fund Trustee Co Pvt Ltd Director IVF (Mauritius) PCC Director IVF( Mauritius) Ltd Director JM Morgan Stanley Financial Services Pvt Ltd Director JM Morgan Stanley Securities Pvt Ltd Director John Fowler ( India) Pvt Ltd Director Biocon Limited

Mr. Suresh N Talwar (cont’d) Larsen & Tourbro Ltd Director Man Financial (India) Pvt. Ltd. Director Renfro Inda Pvt Ltd Director Refco (India) Pvt Limited Director Rediffusion – Dentsu, Young & Rubicam Pvt Ltd Director Sandvik Asia Ltd Director Shrenuj & Co Ltd Director Solvay Pharma India Ltd Director Snowcem Paints Pvt. Ltd Director Swiss Re Shared Sevices (India ) Pvt Ltd Director Showdiff Worldwide Pvt Ltd Director Sonata Software Limited Director Warner Bros Pictures (India) Pvt Ltd Director Albright & Wilson Chemicals India Ltd Alternate Director Beck India Ltd Alternate Director Esab India Limited Alternate Director Garware-Wall Ropes Ltd Alternate Director Johnson & Johnson Ltd Alternate Director Schenectady (India) Holdings Pvt Ltd Alternate Director Schenectady Herdillia Ltd Additional Director Uhde India Ltd Additional Director Wyeth Limited Additional Director

Dr. Bala S Manian ReaMetrix Inc., USA Director ReaMetrix India Pvt. Ltd. Director ICICI Knowledge Park Director

Details of membership/Chairmanship of Directors in Board Committees Following is the list of memberships/ Chairmanships of Directors in the committees* of the Indian public limited companies in which they are holding directorships:-

Name of the Director Name of the Indian public Nature of the Committee Member/ Limited Company Chairman Dr. Kiran Mazumdar- Shaw Biocon Limited Investor Grievance Member

Mr. JMM Shaw Biocon Limited Investor Grievance Member

Prof. Ravi Mazumdar Biocon Limited None None

Dr. Neville Bain Biocon Limited Investor Grievance Chairman Audit Committee Chairman

Prof. Charles Cooney Biocon Limited Audit Committee Member

Mr. Suresh Talwar Blue Star Ltd. Audit Committee Chairman FCI OEN Connectors Ltd Audit Committee Chairman Merck Ltd. Audit Committee Chairman Sandvik Asia Ltd Audit Committee Chairman Biocon Limited Audit Committee Member Blue Star Infotech Ltd Audit Committee Member Beck India Ltd. Audit Committee Member Cadbury India Ltd. Audit Committee Member Solvay Pharma India Ltd Audit Committee Member

Dr. Bala S Manian Biocon Limited None None

None of the Directors of the Company hold memberships of more than ten Committees nor any Director hold Chairmanship of more than ﬁve Committees of the Board of all companies where he holds Directorships.

*For this purpose, Memberships/Chairmanships in Audit Committee and Shareholders’ Grievance Committee are reported and other Committees membership/chairmanship has not been included in the report.

Biocon Annual Report 2006 Financials 5171 Meetings and attendance record of directors Dates for Board meeting in the ensuring year are decided in advance and published as part of the Annual Report. Board meetings are held at the registered ofﬁce at Bangalore. The Company Secretary distributes the Agenda for each meeting along with the explanatory notes in advance to the directors. Every Board member is free to suggest item for inclusion on the agenda. The Board meets at least once a quarter to review the quarterly results and other items on the agenda. During the ﬁnancial year ended 31st March 2006, Board of Directors met 4 times on 20th April, 2005, 20th July 2005, 19th October 2005 and 18th January 2006. The attendance of Directors at the Board meeting during the year and at the last Annual General Meeting is given below: No of Board Attendance at the last Name of the Director meetings attended AGM Dr. Kiran Mazumdar-Shaw 4 Yes Mr. JMM Shaw 4 Yes Prof. Ravi Mazumdar 2 Yes Dr. Neville Bain 4 Yes Prof. Charles Cooney 4 Yes Mr. Suresh Talwar 4 Yes Dr. Bala S Manian 4 Yes

Availability of information to the Members of the Board The Information regularly supplied to the Board includes: • Annual operating plans and budgets, Capital budgets and any updates. • Quarterly results for our operating divisions or business segments. • Minutes of meetings of audit committee, compensation committee, investors Grievance committee and Share transfer committees. • The information on recruitment and remuneration of senior officers just below the board level, including the Company Secretary. • General notice of interest. • Dividend data. • Show cause, demand, prosecution notices and penalty notices which are materially important. • Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems. • Any material default in financial obligations to and by the Company, or substantial nonpayment for goods sold by the Company. • Any issue, which involves possible public or product liability claims of substantial nature • Details of any joint venture, acquisition, technology or collaboration agreement. • Transactions that involve substantial payment towards goodwill, brand equity, or Intellectual property. • Significant development in Human Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc. • Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business. • Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material. • Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc.

Shareholding of Directors No. of shares held as Stock Options Name of the Director on 31.3.2006 Nos. (2000 plan) Grant price (Rs) Expiry date Dr. Kiran Mazumdar-Shaw 39,643,782 - - - Mr. JMM Shaw 703,779 - - - Prof. Ravi Mazumdar* 649,357 - - - Dr. Neville C Bain* 847,279 195,902 0.204 15.4.2006 Prof. Charles Cooney* 310,787 195,902 0.204 15.4.2006 Mr. Suresh N Talwar* 15,000 - - - Dr. Bala S. Manian * 1,250 - - -

* Non- Executive Directors.

Re-appointment of Directors The Directors, Mr. JMM Shaw and Prof. Ravi Mazumdar shall retire by rotation at the ensuing Annual General Meeting and are eligible for reappointment. Their brief resumes and details of their other directorships and committee memberships, including their shareholding have already been provided in the Notice as well as in this report: Biocon Limited

Code of Conduct The Board has laid down a Code of Ethics and Business Conduct for all Board members, senior management and employees of the Company and is posted on the Website.

Certiﬁcate of Code of Conduct for the year 2005-06 Biocon Group is committed to conducting its business in accordance with the applicable laws, rules and regulations and with highest standards of business ethics. The Company has adopted a “Code of Ethics and Business Conduct” which is applicable to all director, ofﬁcers and employees.

I hereby certify that all the Board Members and Senior Management have afﬁrmed the compliance with the Code of Ethics and Business Conduct, under a certiﬁcate of Code of Conduct for the year 2005-06.

(Sd/-) Bangalore Dr. Kiran Mazumdar - Shaw March 31, 2006 Chairman and Managing Director

Notice of interest by senior Management personnel The Board has noted the notice by senior management disclosing all material ﬁnancial and commercial transactions where they have personal interest.

3. Audit Committee: Terms of Reference The terms of reference of Audit Committee are as per the revised guidelines set out in the listing agreement with Stock Exchanges read with Section 292A of the Companies Act, 1956 and includes such other functions as may be assigned to it by Board from time to time. The Audit Committee has entrusted all required authority and powers to play an effective role as envisaged under revised clause 49 of the Listing Agreement.

Composition The Board constituted the Audit Committee on 16th April 2001. The following directors are the current members of the Committee: a) Dr. Neville Bain b) Prof. Charles Cooney c) Mr. Suresh Talwar (w.e.f. July 2003)

The members of the committee are non-executive and independent directors and possess sound knowledge of accounts, ﬁnance, audit and legal matters. Dr. Neville Bain is the Chairman of the Committee.

Meeting and attendance during the year Name No. of meetings held No. of meetings attended Dr. Neville Bain 4 4 Prof. Charles Cooney 4 4 Mr. Suresh Talwar 4 4

During the year 2005-06, the Committee met 4 times on 19th April, 05, 19th July, 05, 18th October, 05 and 17th Jan, 06. The Senior Management and Auditors were invited to attend the meeting of the Audit Committee and attended all meetings. The Company Secretary acts as the Secretary of the Audit Committee.

The Committee reviewed the ﬁnancial results of the Company prepared in accordance with Indian GAAP (including consolidated results) and recommended the same to the Board of Directors for their adoption. The Committee also reviewed the consolidated ﬁnancial results of the Company prepared in accordance with US GAAP as at and for the year ended March 31, 2006 and recommended the same to the Board of Directors for their adoption.

The Committee also recommended to the Board of Directors the re-appointment of M/s S.R.Batliboi & Associates Chartered Accountants, as Statutory Auditors of the Company from conclusion of 2006 Annual General Meeting to forthcoming Annual General Meeting.

The Committee also reviewed Internal Audit reports, Internal Control Systems, utilization of IPO proceeds, risk management policies, related party transaction, etc from time to time.

Biocon Annual Report 2006 Financials 5173 Subsidiary Companies The Company has three subsidiary companies, Syngene International Pvt. Ltd, Clinigene International Pvt. Ltd and Biocon Biopharmaceuticals Pvt. Ltd, more so explained in the Directors Report. None of the Subsidiary companies represent more than 20% of turnover or net worth of Biocon Limited. However, two independent Directors of the Company are on the Board of Syngene International Pvt. Ltd.

The Audit committee of the Company also reviews the ﬁnancial statements of the all the subsidiary companies. The minutes of the Board Meetings of subsidiary companies are placed at the Board Meetings of Biocon Limited and reviewed in detail.

CEO/CFO Certification The Board has recognized Chairman and Managing Director of the Company as CEO and the President – Group Finance as the CFO for the limited purpose of Compliance under the Listing Agreement. The CEO and CFO have certified, in terms of revised clause 49 of the listing agreement, to the Board that the financial statements present a true and fair view of the company’s affairs and are complaint with existing accounting standards, internal control and disclosures.

4. Remuneration Committee: Terms of Reference The terms of reference of the remuneration Committee, inter alia, include determination of compensation package of executive directors and senior management of the Company, determination and supervision the bonus scheme of the Company and to investigation of any activities within the terms of reference. The committee also oversees the employee stock option scheme and recommends the same for the approval of the Board/shareholders. The Committee is empowered to decide the eligibility of the category of employees and the terms and conditions of grants to be extended under the Employee Stock Option Plan schemes of the Company.

Constitution The Board constituted the Remuneration Committee on 16th April 2001. The following directors are the current members of the Committee: a) Prof. Charles Cooney b) Dr. Neville Bain The members of the committee are non-executive and independent directors. Prof. Charles Cooney is the Chairman of the Committee.

Meeting and Attendance during the year During the year 2005-06, the Committee met 4 times on 19th April, 2005, 19th July, 2005, 18th October, 2005 and 17th January 2006 and all the members attended all the meetings.

Remuneration Policy The remuneration policy of the Company is broadly based on the following criteria: a) Job responsibilities b) Key performance areas c) Industry trend d) Remuneration packages in other comparable companies for comparable positions.

Details of Remuneration The details of remuneration and sitting fees paid or provided to each of the Directors during the year ended 31st March 2006 are given below: Name of the Director Salary and perquisites Sitting Fees Rs Rs Board Audit Remuneration Salary Perquisites PF Bonus Total Meeting Committee committee

Dr. Kiran Mazumdar-Shaw 7,670,400 563,000 392,000 1,713,400 10,338,800 - Mr. JMM Shaw 7,670,400 - - 1,713,400 9,383,800 - Prof. Ravi Mazumdar - - - - - 40,000 - Dr. Neville Bain - - - - - 80,000 80,000 20,000 Prof. Charles Cooney - - - - - 80,000 80,000 20,000 Mr. Suresh Talwar - - - - - 80,000 80,000 Dr. Bala S. Manian - - - - - 80,000 Prof. Catherine Rosenberg ------(Alternate Director) Of the Board Members, only Dr. Kiran Mazumdar Shaw and Mr. JMM Shaw are Executive Directors and others are Non- Executive Directors. In addition to the above the remuneration, Dr. Kiran Mazumdar Shaw and Mr. JMM Shaw are entitled to gratuity and leave encashment as per Company policy applicable to all employees. Biocon Limited

Pecuniary relations or transactions of the Non-executive directors There were no pecuniary relationship or transactions of non-executive directors vis- a-vis the Company which has potential conflict with the interests of the company at large. The Company has sought legal opinion from M/s Crawford Bayley & Co., on a need basis. Mr. Suresh Talwar, Director of the Company is partner in M/s Crawford Bayley & Co. Prof. Charles Cooney and Dr. Bala Manian are Chairman and member of the Scientific Advisory Board respectively. None of these transactions has any potential conflict of interest of the Company at large.

The transaction of Non- executive directors were disclosed to the Board and Board noted that all pecuniary relationship and transactions are non-material transactions and does not affect the independence of the Director.

The financial transactions with the Non-Executive Directors during the year were: Name of the person Designation Nature of transaction Amount (Rs) Mr. Suresh Talwar Director Services availed from Crawford Bailey and Co. in which Mr. 32,550/- Suresh Talwar is a partner. Prof. Charles Cooney Director Sitting fees for attending the two meetings of Scientific 20,000/- Advisory Board Dr. Bala S Manian Director Sitting fees for attending two meetings of the Scientific 20,000/- Advisory Board

Compensation/Fees paid to Non Executive Directors The Non-executive directors were paid sitting fees for attending the Board and Committee Meetings.

Dr. Neville Bain and Prof. Charles Cooney, who are non executive independent directors were granted stock options to purchase 195,902 shares each (adjusted for bonus issues and stock splits) in Biocon Limited, in the year 2002. Options for purchase of 48,976 shares each, had vested in 2003 and options for purchase of 97,952 shares each vested in 2005. The balance of 48,974 shares each were vested in the year 2006. All these options were exercised and the shares have been transferred.

Criteria for making payment to Non- Executive Directors The role of non executive/independent Directors of the Company is not just restricted to corporate governance or outlook of the Company but to involve and contribute to the evolution of the Company. The non- executive and independent directors of the Company are eminent scientists, researchers, technocrats and professionals and some of the directors are members of Scientiﬁc Advisory Board of Company. The Company seeks their expert advice on various matters in science, technology, legal or IP. Hence the compensation to the non executive directors towards their professional services to the Company is recommended. Share holders’ approval for payment of fees /compensation is sought in the ensuing Annual General Meeting.

5. Shareholders Disclosure regarding appointment and re-appointment of directors The details of resumes of all the directors who are retiring by rotation and being eligible, proposed to be re-appointed are provided in the Notice to the Annual General Meeting.

Investor Grievances Committee Prior to the Initial Public offering of the Company, i.e. on 17th January 2004, the Board constituted this committee with the following members: a) Dr. Neville Bain, Chairman b) Dr. Kiran Mazumdar -Shaw c) Mr. JMM Shaw

The Committee was formed to speciﬁcally redress the shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of dividends etc. Dr. Neville Bain, Chairman of the Committee is a non-executive and independent Director

During the year 2005-06, the Committee met 4 times on 19th April, 2005, 19th July, 2005, 18th October, 2005 and 17th January 2006 and all the members attended all the meetings.

The Board had also constituted a Share transfer Committee consisting of Dr. Kiran Mazumdar-Shaw, Chairman & Managing Director, Mr. JMM Shaw, Vice Chairman and Mr. K N Murali Krishnan, President Group - Finance of the Company to attend to the share transfer formalities, as and when required.

Biocon Annual Report 2006 Financials 5175 Compliance Ofﬁcer Ms. Usha T N, Company Secretary was designated as the Compliance Ofﬁcer under SEBI (Disclosure and Investor Protection) Guidelines, 2000 for overseeing/ addressing the investor complaints.

Details of Shareholders Complaints Details of the shareholders complaints received and redressed during the year: No. Complaints Received No. Complaints resolved Pending 188 188 0

There have been no material grievances raised and all items referred have been dealt with. All the complaints were resolved to the satisfaction of shareholders. As on 31st March 2006, there were no pending complaints and no pending share transfers.

6. General Body Meetings Location and Time of the General Body Meetings Generally the Annual General Meetings of the Company are convened within four months of the close of the ﬁnancial year. The details of the previous Annual General Meetings are as below: Year Date and Time Venue Special resolutions passed 2002-03 25th July 2003 Registered Ofﬁce Nil 2003-04 15th July 2004 Sathya Sai Samskruta Sadanam, Nil No. 20, Hosur Road, Bangalore - 560 029 2004-05 20th July 2005 Sathya Sai Samskruta Sadanam, Nil No. 20, Hosur Road, Bangalore - 560 029

There were no matters required to be dealt/ passed by the Company by special resolution or through postal ballot, as required under the provisions of Section 192A of the Companies Act, 1956.

Auditors’ Certiﬁcate on Corporate Governance as required by revised Clause 49 of the Listing Agreement is given as an annexure to the Director’s Report.

7. Disclosures Related party transactions There has been no materially significant related party transaction and pecuniary transactions that may have potential conflict with the interests of the Company at large. Audit Committee reviews periodically significant related party transactions i.e. transactions of the Company, which are of material nature, with it's subsidiaries, directors, or relatives or the management that may have potential conflict with the interests of the Company at large. Details are provided in Note 22 to the Notes forming part of the Accounts in accordance with provisions of Accounting Standard 18.

Details of non-compliance There has been no non-compliance of any legal requirements nor have been any strictures imposed on the Company by Stock Exchanges or SEBI or any statutory authority on any matter related to capital markets during the last 3 years.

Whistle Blower policy We have established a mechanism for employees to report concerns about unethical behavior, fraud or violation of code of conduct of the Company. The mechanism provided direct access to the Chairman of the Audit Committee for exceptional cases. All employees can also directly meet the Audit Committee members of the Company. The Whistle Blower Policy has been posted on the Intranet of the Company.

Compliance with non-mandatory requirements of clause 49 of the listing agreement The Company has complied with the non –mandatory requirements to relating to remuneration committee and Whistle Blower policy to the extent detailed above and has not complied with other non-mandatory requirements.

Accounting Treatment The Company’s ﬁnancial statements are prepared as per the guidelines of Accounting Standards and under both Indian GAAP and under US GAAP.

Risk Management The Company has laid down procedures to inform Board Members about the risk assessment and minimization procedures. Audit Committee reviews the risk assessment and control process in the Company every quarter and is satisﬁed that the process is appropriate to the Company needs. The Board also periodically reviews the Risk assessment procedure and risk mitigation procedures laid down by the Company. Biocon Limited

Utilization of Public Issue proceeds The Company has raised Rs 315 crores through the Public issue for setting up new facilities to augment the submerged fermentation and chemical synthesis operation to support the growth objectives of the Company and consolidate the position in the market for these products. The Company has deployed the entire amount of money raised through the public issue for the purpose it has been raised.

Management Discussion and Analysis This is given as a separate section in the Annual Report in accordance with both Indian GAAP and US GAAP ﬁnancials.

8. Means of communication The quarterly, half-yearly and yearly ﬁnancial results will be sent to the Stock Exchanges immediately after the Board approves the same. These results will also be published in English and Kannada newspapers. In the year 2005-06 the results were published in Business Standards and Kannada Prabha.

The results along with presentations made by the Company to Analysts are also posted on the website of the Company viz. www. biocon.com and on the Electronic Data Information Filing and Retrieval (EDIFAR) website maintained by SEBI in association with the National Informatics Centre (NIC). The Company's website also displays all ofﬁcial news releases.

The Company organizes investor conference calls to discuss its ﬁnancial results every quarter where investor queries are answered by the Executive Management of the Company. The transcripts of the conference calls are also posted on our website.

Management Discussion and Analysis has been done by the Directors and forms part of Directors Report.

9. General Shareholder' Information i) Annual General Meeting: Date and Time : 19th July 2006 at 3.30 P.M. Venue : Sathya Sai Samskruta Sadanam, No. 20, Hosur Road, Bangalore - 560 029 ii) Financial Calendar for 2006-07 : The following are tentative dates: First Quarterly results : 19th July 2006 Half-yearly Results : 18th October 2006 Third Quarterly Results : 18th January 2007 Annual results 2006-06 : 19th April 2007 AGM for the year 2006-07 : 18th July, 2007 iii) Dates of Book Closure : Saturday, 1st July 2006 to Wednesday, 19th July 2006 Both days inclusive iv) Dividend payment date : On or after 19th July, 2006 v) Listing on Stock Exchanges : The National Stock Exchange of India Ltd Exchange Plaza, Bandra Kurla Complex Bandra (East), Mumbai - 400 051 and The Stock Exchange, Mumbai P J Towers, Dalal Street, Mumbai - 400 001 Listing is effective from 7th April 2004 vi) Stock Code/Symbol : NSE - BIOCON BSE – 532523 vii) International Securities Identiﬁcation Number : INE 376G01013

Biocon Annual Report 2006 Financials 5177 viii) Market Price data during 2005-06: The monthly high/low prices of shares of the Company from April 1, 2005 to March 31, 2006 are given below: BSE NSE Sl. No Month High(Rs) Low(Rs) Volume of Shares High(Rs) Low(Rs) Volume of Shares 1 April-05 455.00 395.00 1268523 446.35 393.00 3,243,915 2 May-05 431.45 392.00 1143016 433.00 392.15 2,801,033 3 June-05 464.95 413.00 1025236 448.00 382.65 2,190,255 4 July-05 464.40 421.00 1090882 463.00 421.30 2,421,940 5 August-05 479.90 415.00 905600 479.00 432.50 1,970,603 6 September-05 503.50 441.05 996493 502.70 442.00 2,536,933 7 October-05 537.90 458.60 3669014 536.00 455.00 6,085,236 8 November-05 532.60 475.00 912437 525.90 460.00 1,834,788 9 December-05 517.90 450.90 2780977 518.00 477.00 2,505,402 10 January-06 505.00 450.00 3109520 504.90 456.50 1,698,552 11 February-06 488.70 440.10 678548 489.70 449.00 996,712 12 March-06 489.00 437.50 930174 497.95 435.00 1,519,402 ix) Relative movement chart The chart below gives the relative movement of the closing price of the Company’s share and the benchmark NSE Nifty/BSE Sensex relative to the closing price. The period covered is April 1, 2005 to March 31, 2006 The Biocon Management cautions that the stock price movement shown in the graph below should not be considered indicative of potential future stock price performance.

Biocon - S & P Nifty Price Chart

525 3600 3300

475 3000 2700 Rs 425 2400 Index Values 2100

375 1800 Apr - 05 Jul - 05 Sep - 05 Dec - 05 Mar - 06

Biocon Close S & P CNX Nifty Close

Biocon - BSE Sensex Price Chart

525 12500 11500 475 10500 9500 Rs 425 8500 7500 Index Values 6500 375 5500 Apr - 05 Jul - 05 Sep - 05 Dec - 05 Mar - 06

Biocon Close BSE Sensex Close Biocon Limited

x) Registrar and Transfer Agents : Karvy Computershare Private Limited Karvy House, 46, Avenue 4, Street No. 1, Banjara Hills, Hyderabad - 500 034 xi) Share Transfer System The shares of the Company are traded in the Compulsory DEMAT mode for all investors. The Share Transfer Committee approves the transfer of shares in the physical form as per the time limits speciﬁed in the Listing Agreement. xii) Distribution of the Shareholding The distribution of shareholding as on 31st March 2006, pursuant to clause 35 of the listing agreement is as under:

A. Shareholding per category Categories No of Shares held Percentage held A) PROMOTERS' HOLDING 1. Promoters - Indian Promoters 39,643,782 39.64 - Foreign Promoters 20,471,376 20.47 2. Persons acting in concert 780,415 0.78

Sub-total 60,895,573 60.90 B) NON PROMOTERS' HOLDING 3. Institutional Investors - Mutual Funds and UTI 1,263,345 1.26 - Banks, FIs, Insurance Cos. 1,206,524 1.21 - Foreign Institutional Investors 11,511,364 13.98 Sub-total 13,981,233 13.98 4. Others a) Pvt. Corporate Bodies 1,123,419 1.12 b) Indian Public 15,114,337 15.11 c) NRIs 684,507 0.68 d) Any other i) Trusts 6,342,492 6.34 ii) HUF 193,884 0.19 iii) Clearing Members 69,494 0.07 iv) Directors(s) 1,174,316 1.17 v) Foreign Nationals 420,745 0.42 Sub-total 25,123,194 25.12 GRAND TOTAL 100,000,000 100.00

B. Distribution of shareholding by no. of shares Distribution Schedule as on 31.3.2006 No. of % of Shares of Nominal Value of Shareholders % Total Shares Share value (Rs) Amount 1 - 5,000 87,207 98.83% 6,594,822 32,974,110 6.59% 5,001 - 10,000 507 0.57% 751,099 3,755,495 0.75% 10,001 - 20,000 235 0.27% 664,634 3,323,170 0.66% 20,001 - 30000 71 0.08% 352,348 1,761,740 0.35% 30,001 - 40,000 30 0.03% 207,440 1,037,200 0.21% 40,001 - 50,000 21 0.02% 197,222 986,110 0.20% 50,001 - 100,000 55 0.06% 777,594 3,887,970 0.78% 100001 & Above 112 0.13% 90,454,841 452,274,205 90.45% Total 88,238 100% 100,000,000 500,000,000 100%

Biocon Annual Report 2006 Financials 5179 xiii) Dematerialization of shares and liquidity As on 31st March, 2006 294,224 shares (0.29%) of the shares of Company were in physical form.

Consequent to the IPO of 10% of the Company’s paid-up capital, in March 2004, 20,000,000 shares held by the Promoters of Biocon, representing 20.00% of the total paid-up share capital, is locked in for 3 years from the date of allotment under the IPO, i.e. till 31st March 2007, as per the SEBI (DIP) Guidelines, 2000. xiv) Outstanding GDRs/ ADRs/Warrants and convertible instruments, conversion date and likely impact on equity : Not applicable xv) Plant locations i) 20th KM, Hosur Road, Electronic City P.O. Bangalore - 560 100 ii) Plot No 113/C2, Bommasandra Industrial Area, Bommasandra, Bangalore - 560 09 iii) Biocon Park Plot No 2, 3, 4 and 5 Bommasandra – Jigani Link Road Bangalore – 560 099 xvi) Address for correspondence : Investor correspondence may be addressed to: a) Usha T N, Company Secretary (Compliance Ofﬁcer) Biocon Limited 20th KM, Hosur Road, Electronic City, Bangalore - 560 100 b) Karvy Computershare Private Limited Karvy House, 46, Avenue 4, Street No. 1, Banjara Hills, Hyderabad - 500 034 Biocon Limited

AUDITORS’ CERTIFICATE ON CORPORATE GOVERNANCE

To The Members of Biocon Limited

We have examined the compliance of conditions of corporate governance by Biocon Limited ('Company'), for the year ended on March 31, 2006, as stipulated in clause 49 of the Listing Agreement of the Company with stock exchanges.

The compliance of conditions of corporate governance is the responsibility of the management. Our examination was limited to procedures and implementation thereof, adopted by the Company for ensuring the compliance of the conditions of the Corporate Governance. It is neither an audit nor an expression of opinion on the ﬁnancial statements of the Company.

In our opinion and to the best of our information and according to the explanations given to us, we certify that the Company has complied with the conditions of Corporate Governance as stipulated in the above mentioned Listing Agreement.

We further state that such compliance is neither an assurance as to the future viability of the Company nor the efﬁciency or effectiveness with which the management has conducted the affairs of the Company.

S.R. BATLIBOI & ASSOCIATES Chartered Accountants

Per Prashant Singhal Partner Membership No: 93283

Bangalore April 20, 2006

Biocon Annual Report 2006 Financials 5181 AUDITORS’ REPORT

To The Members of Biocon Limited

1. We have audited the attached Balance Sheet of BIOCON LIMITED as at March 31, 2006 and also the Profit and Loss account and the Cash Flow statement for the year ended on that date annexed thereto. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with auditing standards generally accepted in India. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. As required by the Companies (Auditor’s Report) Order, 2003 (as amended) issued by the Central Government of India in terms of sub- section (4A) of Section 227 of the Companies Act, 1956, we enclose in the Annexure a statement on the matters speciﬁed in paragraphs 4 and 5 of the said Order.

4. Without qualifying our opinion, we draw attention to Note 1(b) to the financial statements relating to the status and recoverability of the Company's investments in Nobex Inc., USA ('Nobex'). As more fully discussed in Note 1(b) to the financial statements, the Company had invested Rs 256 Million in the common stock and promissory notes of Nobex from October 2004 through December 31, 2005. As on December 1, 2005, Nobex had filed for bankruptcy under Chapter 11 of US Bankruptcy laws. The audit report for the three month period and nine-month period ended December 31, 2005 was modified as there was a uncertainty with respect to the Company's ability to recover its investments in Nobex from the monetization of intellectual properties.

Pursuant to the Company emerging as the winning bidder for the assets of Nobex at a bid value of US $ 5 Million the sale process for which is expected to be completed within April 2006, the Company is conﬁdant that it would be able to commercialise the intellectual properties acquired and generate value in excess of its aggregate investments.

The ultimate realisability of the Nobex investments, including the current bid, is dependant on the Company's ability to successfully commercialise the Intellectual Properties and, accordingly, these ﬁnancial statements do not include any adjustments from the outcome of this uncertainty.

5. Further to our comments in the Annexure referred to above, we report that: i. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit. ii. In our opinion, proper books of account as required by law have been kept by the Company so far as appears from our examination of those books. iii. The Balance Sheet, Profit and Loss account and Cash Flow statement dealt with by this report are in agreement with the books of account. iv. In our opinion, the Balance Sheet, Profit and Loss account and Cash Flow statement dealt with by this report comply with the accounting standards referred to in sub-section (3C) of section 211 of the Companies Act, 1956. v. On the basis of the written representations received from the directors, as on March 31, 2006, and taken on record by the Board of Directors, we report that none of the directors is disqualified as on March 31, 2006 from being appointed as a director in terms of clause (g) of sub-section (1) of section 274 of the Companies Act, 1956 vi. In our opinion and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India;

(a) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2006;

(b) in the case of the Proﬁt and Loss account, of the proﬁt for the year ended on that date; and

For S.R. BATLIBOI & ASSOCIATES Chartered Accountants

per Prashant Singhal Partner Membership No: 93283

Bangalore April 20, 2006 Biocon Limited

ANNEXURE REFERRED TO IN PARAGRAPH 3 OF OUR REPORT OF EVEN DATE

Re: Biocon Limited

1. The Company has maintained proper records showing full particulars, including details and situation, of fixed assets, however, is in the process of updating the quantitative records for certain fixed assets. Fixed assets have been physically verified by the management during the year in accordance with a regular programme of verification, intended to cover all the fixed assets of the Company over a period of two years, which, in our opinion, is reasonable having regard to the size of the Company and the nature of its assets. As informed, no material discrepancies were noticed on such verification. There was no substantial disposal of fixed assets during the year.

2. The management has conducted physical verification of inventory at reasonable intervals during the year. The procedures of physical verification of inventory (except for goods in bond and in transit) followed by the management are reasonable and adequate in relation to the size of the Company and the nature of its business. The Company is maintaining proper records of inventory and no material discrepancies were noticed on physical verification.

3. As informed, the Company has granted unsecured loans to two companies listed in the register maintained under section 301 of the Companies Act, 1956 ('the Act'). The maximum amount involved during the year was Rs 723 Million and the balance outstanding at March 31, 2006 was Rs 193 Million. In our opinion and according to the information and explanation given to us, the loan given to one of its subsidiary is interest free, the rate of interest for the other loan and other terms and conditions of the loans given by the Company during the year, are not prima facie prejudicial to the interest of the Company. Based on our audit procedures and the information and explanation made available to us, there is no overdue amount of the loan granted by the Company to the companies listed in the register maintained under section 301 of the Companies Act, 1956. The Company has not taken/granted any other loans from/to companies, ﬁrms or other parties listed in the register maintained under section 301 of the Act.

4. In our opinion and according to the information and explanations given to us, there is an adequate internal control system commensurate with the size of the Company and the nature of its business, for the purchase of inventory and ﬁxed assets and for the sale of goods and services. During the course of our audit, no major weakness has been noticed in the internal control system in respect of these areas.

5. According to the information and explanations provided by the management, we are of the opinion that the particulars of contracts or arrangements referred to in section 301 of the Act, that need to be entered into the register maintained under section 301 have been so entered. In respect of transactions made in pursuance of such contracts or arrangements exceeding value Rupees ﬁve lakhs entered into during the ﬁnancial year, because of the unique and specialized nature involved and absence of any comparable prices, we are unable to comment whether the transactions are made at prevailing market prices at the relevant time.

6. The Company has not accepted any deposits from the public.

7. In our opinion, the Company has an internal audit system, commensurate with the size of the Company and the nature of its business.

8. To the best of our knowledge and as explained, the Central Government has not prescribed the maintenance of cost records under clause (d) of section 209(1) of the Companies Act, 1956 for the products of the Company.

9. Undisputed statutory dues including provident fund, investor education and protection fund, or employees’ state insurance, income- tax, sales-tax, wealth-tax, service tax, customs duty, excise duty, cess have generally been regularly deposited with the appropriate authorities except for entry tax payable under Karnataka Tax on Entry of Goods Act, 1979.

According to the information and explanations given to us, there were no undisputed dues in respect of provident fund, investor education and protection fund, employees’ state insurance, income-tax, wealth-tax, service tax, sales-tax, customs duty, excise duty, cess and other statutory dues which were outstanding, at the year end for a period of more than six months from the date they became payable except for entry tax payable under Karnataka Tax on Entry of Goods Act, 1979 as follows :

Name of the statute Nature of dues Amount Period to which the Due Date Date of Payment (Rs) amount relates Karnataka Tax on Entry of Entry tax on causing Due on 20th of - - Goods Act, 1979 entry of notiﬁed 734,828 2004-2005 following month goods in Karnataka Karnataka Tax on Entry of Entry tax on causing Due on 20th of - - Goods Act, 1979 entry of notiﬁed 163,422 2005-2006 the following goods in Karnataka month

Biocon Annual Report 2006 Financials 5183 According to the records of the Company, the dues outstanding of income-tax , sales-tax, wealth-tax, service tax , custom duty, excise duty and cess on account of any dispute, are as follows:

Name of the statute Nature of dues Amount Period to which the Forum where dispute is (Rs) amount relates pending The Central Excise Dispute in classification of 633,417* 1994-1995 Assistant Collector of Central Act, 1944 certain products Excise. The Central Excise Non-inclusion of freight in 3,986 2003-2004 Superintendent of Central Act, 1944 valuation of goods Excise, Bangalore The Central Excise Non-inclusion of freight and 9,725 2003-2004 In process of application against Act, 1944 insurance in valuation of goods demand notice The Central Excise Dispute regarding eligibility for 1,491,438 2004-2005 Customs, Excise and Service Tax Act, 1944 notification benefit Appellate Tribunal Chennai The Central Excise Dispute regarding eligibility for 1,513,846* 2004-2005 Customs, Excise and Service Tax Act, 1944 notification benefit Appellate Tribunal Chennai Income-tax Act, 1961 Assessment year 1994-1995 2,076,607* 1993-1994 Order has been passed by the ITAT. The Company has filed an appeal before the High Court. Income-tax Act, 1961 Assessment year 1995-1996 2,874,354* 1994-1995 Order has been passed by the ITAT. The Company has filed an appeal before the High Court. Income-tax Act, 1961 Assessment year 1996-1997 2,951,633* 1995-1996 Order has been passed by the ITAT. The Company has filed an appeal before the High Court. Income-tax Act, 1961 Assessment year 1997-1998 3,878,830* 1996-1997 Case referred by CIT (Appeals) to assessing officer for re- computing the tax payable. In addition, an order was passed by ITAT during the year and the Company is in the process of filing an appeal before the High Court. Income-tax Act, 1961 Assessment year 1998-1999 4,040,002* 1997-1998 Case referred by CIT (Appeals) to assessing officer for re- computing the tax payable. In addition, an order was passed by ITAT during the year and the Company is in the process of filing an appeal before the High Court.

* These amounts were paid in protest.

10. The Company has no accumulated losses at the end of the ﬁnancial year and it has not incurred any cash losses in the current and immediately preceding ﬁnancial year.

11. Based on our audit procedures and on the information and explanations given by the management, we are of the opinion that the Company has not defaulted in repayment of dues to a ﬁnancial institution, bank or debenture holders.

12. According to the information and explanations given to us and based on the documents and records produced to us, the Company has not granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities.

13. In our opinion, the Company is not a chit fund or a nidhi/mutual beneﬁt fund/society. Therefore, the provisions of clause 4(xiii) of the Companies (Auditor’s Report) Order, 2003 (as amended) are not applicable to the Company.

14. In our opinion, the Company is not dealing in or trading in shares, securities, debentures and other investments. Accordingly, the provisions of clause 4(xiv) of the Companies (Auditor’s Report) Order, 2003 (as amended) are not applicable to the Company.

15. According to the information and explanations given to us, the Company has not given any guarantee for loans taken by others from bank or ﬁnancial institutions. Biocon Limited

16. The Company did not have any term loans during the year.

17. According to the information and explanations given to us and on an overall examination of the balance sheet and cash ﬂow statement of the Company, we report that no funds raised on short-term basis have been used for long-term investment.

18. The Company has not made any preferential allotment of shares to parties or companies covered in the register maintained under section 301 of the Companies Act, 1956.

19. The Company did not have any outstanding debentures during the year.

20. We have veriﬁed the end use of money raised by public issues is as disclosed in the notes to the ﬁnancial statements.

21. Based upon the audit procedures performed for the purpose of reporting the true and fair view of the ﬁnancial statements and as per the information and explanations given by the management, we report that no fraud on or by the Company has been noticed or reported during the course of our audit.

For S.R. BATLIBOI & ASSOCIATES Chartered Accountants

per Prashant Singhal Partner Membership No: 93283

Bangalore April 20, 2006

Biocon Annual Report 2006 Financials 5185 BIOCON LIMITED BALANCE SHEET - MARCH 31, 2006 (All amounts in Indian Rupees thousands)

Notes 2006 2005 (Note 30) SOURCES OF FUNDS Shareholders’ Funds Share capital 3 500,000 500,000 Reserves and surplus 2(a), 2(m) & 4 7,530,435 6,459,384 8,030,435 6,959,384 Loan Funds Secured loans 5 677,549 493,279 Unsecured loans 6 372,927 270,136 1,050,476 763,415

Deferred Tax Liability 2(k) & 7 279,738 219,597

9,360,649 7,942,396 APPLICATION OF FUNDS Fixed Assets 2(b), 2(c), 2(d), 2(j) 2(i), 8 & 17 Cost 3,161,061 2,702,017 Less: Accumulated depreciation 882,938 653,721 Net book value 2,278,123 2,048,296 Capital work-in-progress [including capital advances of Rs 63,314 (March 31, 2005 -- Rs 47,417)] 4,564,301 3,100,026 6,842,424 5,148,322

Investments 2(g) & 9 1,390,554 2,430,048

Current Assets, Loans And Advances Inventories 2(e) & 10 1,053,083 712,922 Sundry debtors 11 2,060,369 1,728,842 Cash and bank balances 12 20,035 34,201 Loans and advances 13 212,135 170,142 3,345,622 2,646,107 Less: Current Liabilities And Provisions 2(h), 2(i),2(k), 2(g), 14 & 23 2,217,951 2,282,081 Net Current Assets 1,127,671 364,026

9,360,649 7,942,396

The accompanying notes 1 to 30 form an integral part of this balance sheet

As per our report of even date S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary

Biocon Limited

BIOCON LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED MARCH 31, 2006 (All amounts in Indian Rupees thousands, except share data including share price)

Notes 2006 2005 (Note 30) INCOME Gross sales 7,246,713 6,842,047 Less: Excise duty 371,789 378,423 Net sales 2(l) & 2(i) 6,874,924 6,463,624 Contract research fees 2(l) & 2(i) - 1,474 Other income 15 56,911 156,513 6,931,835 6,621,611

EXPENDITURE Manufacturing, contract research and other expenses 2(d), 2(h), 2(i), 2(j) 5,077,718 4,535,670 2(m), 2(o) & 16 Interest and ﬁnance charges 2(l) & 18 16,887 19,931 5,094,605 4,555,601

PROFIT BEFORE DEPRECIATION AND TAXES 1,837,230 2,066,010 Depreciation 2(b) & 8 230,102 182,521 Less: Amount transferred from revaluation reserve 2(b) & 4 1,606 1,606 228,496 180,915 PROFIT BEFORE TAXES 1,608,734 1,885,095 Provision for income-tax Current taxes 2(k) & 21 208,633 98,298 Deferred taxes 2(k) & 7 60,141 42,917 Fringe Beneﬁts 21 5,130 - NET PROFIT FOR THE YEAR 1,334,830 1,743,880 Balance brought forward from previous year 2,385,167 1,043,725 PROFIT AVAILABLE FOR APPROPRIATION 3,719,997 2,787,605 Proposed dividend on equity shares 250,000 200,000 Tax on proposed dividend 35,063 28,050 Transfer to general reserve 133,483 174,388 BALANCE, END OF THE YEAR 3,301,451 2,385,167 Earnings per share (equity shares, par value of Rs 5 each) Basic (in Rs) 2(m) 13.97 18.43 Diluted (in Rs) 13.79 18.00 Weighted average number of shares used in computing earnings per share Basic 95,567,448 94,597,811 Diluted 96,791,300 96,861,668

The accompanying notes 1 to 30 form an integral part of the proﬁt and loss account.

As per our report of even date S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary

Biocon Annual Report 2006 Financials 5187 BIOCON LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2006 (All amounts in Indian Rupees thousands)

2006 2005 I. CASH FLOWS FROM OPERATING ACTIVITIES : Net proﬁt before tax 1,608,733 1,885,095 Adjustments for

Add: Non cash item/items required to be disclosed separately: Depreciation 228,496 180,915 Unrealised exchange (gain)/loss (9,198) (2,802) Amortisation of employee compensation cost 9,467 23,396 Provision for bad and doubtful debts 2,578 2,443 Interest expense 24,814 26,863 Interest income (gross) (23,713) (9,124) Dividend earned (gross) (22,076) (112,811) Gain on sale of investments - (250) Gain on sale of investment in mutual funds (1,835) (1,612) Gain on assets sold (346) - Write back of provision - (13,185) 208,187 93,833 Changes in working capital and other provisions Inventories (340,162) 126,599 Sundry debtors (329,854) (573,973) Loans and advances (59,567) 44,900 Current liabilities and provisions (incl book overdraft) (501,039) 75,817 (1,230,622) (326,657) (1,022,435) (232,824) Cash generated from operations 586,298 1,652,271 Tax paid (net of refunds) (182,414) (99,169) Net cash provided by operating activities 403,884 1,553,102

II. CASH FLOWS FROM INVESTING ACTIVITIES : Fixed assets Purchase (1,570,824) (2,511,714) Sale 500 - Interest received 23,884 8,521 Dividend received 22,076 112,811 Loan to Subsidiary / Joint Venture Companies (530,119) (143,527) Sale of investment 3,463,234 11,607,609 Purchase of investment Long term (381,010) (197,393) Current (1,510,775) (13,556,370) Net cash used for investing activities (483,034) (4,680,063)

III. CASH FLOWS FROM FINANCING ACTIVITIES : Short term borrowings from banks, net 183,500 20,384 Repayment of secured loans - (24) Deferred sales tax credit 102,791 95,479 Dividend paid (199,275) (100,000) Dividend tax paid (28,050) (12,813) Interest paid (24,979) (26,886) Movement in reserves of ESOP trust 13,423 5,450 Net cash used for ﬁnancing activities 47,410 (18,410)

IV. NET CHANGE IN CASH AND CASH EQUIVALENTS ( I+II+III) (31,740) (3,145,371) V. CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 34,201 3,175,114 VI. CASH AND CASH EQUIVALENTS OF THE ESOP TRUST ACQUIRED DURING THE YEAR 17,574 4,458 VII. CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR (IV + V + VI) 20,035 34,201 As per our report of even date S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary Biocon Limited

BIOCON LIMITED

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2006

(All amounts in Indian Rupees and US Dollars in thousands, except share data including share price)

1. Background a. Incorporation and history Biocon Limited (‘Biocon’ or ‘the Company’), promoted by Ms Kiran Mazumdar Shaw (‘KMZ’), was incorporated at Bangalore in 1978 for manufacture of biotechnology products. On November 17, 2003, the name of the Company was changed from Biocon India Limited to Biocon Limited. The Company has its facilities at Hebbagodi and Bommasandra, Bangalore district, Karnataka and is engaged in manufacturing biotechnological products in the pharmaceutical and enzyme sectors through fermentation based technology and the Company has also made an entry into the formulations business.

In March 2002, the Company acquired 99.99 per cent of the share capital of Syngene International Private Limited (‘Syngene’), a contract research Company. Syngene was also promoted and controlled by KMZ and the consideration for such acquisition was the issue of 202,780 equity shares of Biocon of Rs 10 each, determined on the basis of fair values as approved by the statutory authorities.

Also, the Company, on March 31, 2001, acquired 100 per cent equity of Clinigene International Private Limited (‘Clinigene’), a Company that undertakes clinical research activities.

Biocon entered into an Agreement on February 22, 2002 to set up a Joint Venture Company, with CIMAB SA (‘CIMAB’), a Company organised and existing under the laws of Cuba and engaged in research, development, manufacturing and marketing of Biopharma- ceuticals, to manufacture and market products using technology and to carry out research activities. Accordingly, Biocon Biopharma- ceuticals Private Limited (‘BBPL’) was incorporated on June 17, 2002 and, on April 18, 2003, Biocon acquired a 51 per cent shareholding in BBPL.

In March 2004, the Company completed an Initial Public Offering (‘IPO’) and made a fresh issue of 10,000,000 equity shares of Rs 5 each at a price of Rs 315 per share. Consequently, on April 7, 2004, the equity shares of the Company were listed on the National Stock Exchange of India and The Stock Exchange, Mumbai. The proceeds of the issue will be used for setting up the new facilities to augment the existing capacities for the submerged fermentation and chemical synthesis operations (collectively referred to as ‘the Project’).

The construction of the Project is almost complete, subject to the final commissioning and testing of the effluent treatment plant and certain pre-commissioning tests, which the Company expects to be completed during the quarter ending June 30, 2006. All direct costs related to such pre-commissioning tests are included in the Capital work-in-progress and would be capitalized with the Project. Further, proceeds, if any, from the sale of trial production resulting from such pre-commissioning tests; and/or profits, if any, from the transfer of the trial run production to the existing Biocon facility of these trial production have been reduced from Capital work in progress. b. Investments in Nobex Inc., USA The Company had entered into Research and Development Agreements and Investment Agreements with Nobex Inc., USA (‘Nobex’) [Refer Note 9(i)] to carry out joint research and development for Oral Insulin, Basil Insulin and Oral BNP on October 20, 2004 and April 25, 2005, respectively; and invested Rs 256 Million in the common stock and promissory notes from October 2004 through December 31, 2005. It has further paid Rs 13 Million towards licence fees for Oral Insulin and Rs 54 Million towards loan and security arrangement entered on December 1, 2005 to facilitate the orderly sale of asset. The investments of Rs 339 Million upto March 31, 2006 is reflected as investments (schedule 9).

As on December 1, 2005, Nobex had ﬁled for bankruptcy under Chapter 11 of US Bankruptcy laws. Consequently, the audit report for the three month period and nine-month period ended December 31, 2005 was modiﬁed as there was uncertainty with respect to the Company’s ability to recover its investments in Nobex from the monetization of intellectual properties.

Subsequently on March 20, 2006, the Company has emerged as the winning bidder for the assets of Nobex; including, without limitation, patents relating to certain technologies for Oral Insulin, Oral BNP and Basil Insulin, for a total consideration of US$ 5. Million. The Closing for the sale process is expected to be completed within April 2006; accordingly, the total commitment made by Biocon including investments already made aggregates to US$ 12 Million. Also, the Company has incurred Rs 21 Million of legal costs directly related to the acquisition of these patents upto March 31, 2006, and the same is included under capital work in progress.

Biocon Annual Report 2006 Financials 5189 Based on the joint product development programs carried on for the Oral Insulin and BNP since October 20, 2004 and April 25, 2005, respectively, the Company is conﬁdent that it would be able to commercialise the intellectual properties acquired from Nobex by the year 2012 and based on an expert independent opinion, believes the value of such monetized intellectual property over its economic life to be in excess of the total investments made by it/to be made in Nobex. The ultimate realisability of this investments cannot be presently determined and, accordingly, these ﬁnancial statements do not include any adjustments.

2. Statement of significant accounting policies a. Basis of preparation The financial statements have been prepared to comply in all material respects with the mandatory Accounting Standards issued by the Institute of Chartered Accountants of India and the relevant provisions of the Companies Act, 1956. The financial statements have been prepared under the historical cost convention on an accrual basis. The accounting policies have been consistently applied by the Company are consistent with those used in the previous year. In accordance with the revised Employee Stock Option Scheme and Stock Purchase Guidelines 1999 (‘SEBI guidelines’) issued by SEBI, the Company has consolidated the Biocon India Limited Employee Welfare Trust (‘ESOP Trust’). b. Fixed assets and depreciation Fixed assets are stated at cost, except for revalued freehold land and buildings, which are shown at, estimated replacement cost as determined by valuers less impairment loss, if any, and accumulated depreciation. The Company capitalises all costs relating to the acquisition and installation of fixed assets.

Fixed assets, other than freehold land, but including revalued buildings, are depreciated pro rata to the period of use, on the straight line method at the annual rates based on the estimated useful lives.

Per cent Buildings 4.00 Plant and machinery 9.09 - 33.33 Research and development equipment 11.11 Furniture and ﬁxtures 16.67 Vehicles 16.67

Leasehold land on a lease-cum-sale basis are capitalised at the allotment rates charged by the Municipal Authorities. Leasehold improvements are being depreciated over the lease term or useful time whichever lower.

The depreciation charge over and above the depreciation calculation on the original cost of the revalued assets is transferred from the revaluation reserve to the proﬁt and loss account.

The above rates are higher than the rates prescribed under Schedule XIV of the Companies Act, 1956.

Assets individually costing less than Rs 5 are fully depreciated in the year of purchase. c. Impairment of long-lived assets Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the income statement for items of ﬁxed assets carried at cost. The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtained from the sale of an asset in an arm’s length transaction while value in use is the present value of estimated future cash ﬂows expected to arise from the continuing use of an asset, from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if not possible, for the cash generating unit. Impairment loss recognised for an asset in earlier accounting periods is reversed, to the extent of its recoverable amount, if there has been a change in the estimates of used to determine the asset’s recoverable amount since the last impairment loss was recognised. d. Intangibles Goodwill Goodwill is amortised over a period of 5 years and assessed for impairment at each balance sheet date.

Intellectual Property rights Costs relating to intellectual property rights which are acquired are capitalized and amortized on a straight-line basis over their estimated useful lives or ten years whichever is lower. Biocon Limited

Research and Development Costs Research and development costs, including technical know-how fees, incurred for development of products are expensed as incurred, except for development costs which relate to the design and testing of new or improved materials, products or processes which are recognised as an intangible asset to the extent that it is expected that such assets will generate future economic beneﬁts. Research and development expenditure of a capital nature is added to ﬁxed assets. Any expenditure carried forward is amortised over the period of expected future sales from the related project, not exceeding ten years.

The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use, and otherwise when events or changes in circumstances indicate that the carrying value may not be recoverable. e. Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined on a first-in-first-out basis and includes all applicable overheads in bringing the inventories to their present location and condition. Excise duty arising on finished goods and customs duty on imported raw materials in stock (excluding stocks in the bonded warehouse) are treated as part of the cost of inventories. f. Revenue recognition (i) Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and are recorded net of excise duty, sales tax and other levies. For the purposes of disclosure in these financial statements, sales are reflected gross and net of excise duty in the profit and loss account. (ii) Contract research fees are recognized as services are rendered, in accordance with the terms of the contracts, in case of services performed on “time and material basis”. Revenues relating to fixed price contracts are recognised based on the percentage of completion method. g. Investments Investments that are readily realisable and intended to be held for not more than 12 months are classified as current investments. All other investments are classified as long-term investments. Long term investments are stated at cost. However, provision for diminution in value is made to recognise a decline other than temporary in the value of the investments. Current investments are carried at lower of cost and fair value and determined on an individual investment basis. h. Retirement benefits The Company has schemes of retirement benefits for provident fund and gratuity in respect of which, the Company’s contributions are charged to the profit and loss account. The contributions towards provident fund are made to statutory authorities. The gratuity and superannuation fund benefits of the Company are administered by a trust formed for this purpose through the group gratuity scheme with Birla Sun Life Insurance Company Limited (‘Birla Sunlife’). In respect of gratuity, the liability is accrued based on an independent actuarial valuation at the year end. In respect of superannuation, the Company has accrued the liability, based on the schemes of the Company. The Company has discontinued the superannuation scheme during the period with effect from April 1, 2005. i. Leave encashment Liability for leave encashment is in accordance with the rules of the Company and is provided on the basis of an actuarial valuation performed by an independent actuary at the year end. j. Foreign currency transactions Initial Recognition Foreign currency transactions are recorded in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.

Conversion Foreign currency monetary items are reported using the closing rate. Non-monetary items which are carried in terms of historical cost denominated in a foreign currency are reported using the exchange rate at the date of the transaction; and non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency are reported using the exchange rates that existed when the values were determined.

Exchange Differences Exchange differences arising on the settlement of monetary items or on the Company’s monetary items at rates different from those at which they were initially recorded during the year, or reported in previous ﬁnancial statements, are recognised as income or as expenses in the year in which they arise except those arising from investments in non-integral operations.

Biocon Annual Report 2006 Financials 5191 Exchange differences arising on a monetary item that, in substance, form part of the Company’s net investment in a non-integral foreign operation is accumulated in a foreign currency translation reserve in the ﬁnancial statements until the disposal of the net investment, at which time they are recognised as income or as expenses.

Exchange differences relating to the acquisition of ﬁxed assets are adjusted to the costs of the ﬁxed assets.

Forward Exchange Contracts not intended for trading or speculation purposes The premium or discount arising at the inception of forward exchange contracts is amortised as expense or income over the life of the contract. Exchange differences on such contracts are recognised in the statement of proﬁt and loss in the year in which the exchange rates change. Any proﬁt or loss arising on cancellation or renewal of forward exchange contract is recognised as income or as expense for the year.

Foreign Currency Options Contracts not intended for trading or speculation purposes The Company enters into foreign currency option contracts to hedge its risks with respect to realisation of future receivables. The costs of these contracts, if any, are expensed over the period of the contract. The Company recognizes the loss/gain on the Expiry or Cancellation, whichever is earlier, of the Options Contracts. k. Income tax Tax expense comprises both current and deferred taxes. Current income- tax is measured at the amount expected to be paid to the tax authorities in accordance with the Indian Income Tax Act. Deferred income taxes reflects the impact of current year timing differences between taxable income and accounting income for the year and reversal of timing differences of earlier years. Deferred tax is measured based on the tax rates and the tax laws enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Deferred tax assets are recognised on carry forward of unabsorbed depreciation and tax losses only if there is virtual certainty that such deferred tax assets can be realised against future taxable profits. Unrecognised deferred tax assets of earlier years are re-assessed and recognised to the extent that it has become reasonably certain that future taxable income will be available against which such deferred tax assets can be realised. l. Borrowing costs Borrowing costs that are attributable to the acquisition and construction of a qualifying asset are capitalised as a part of the cost of the asset. Other borrowing costs are recognised as an expense in the year in which they are incurred. m. Deferred employee stock compensation costs Deferred employee stock compensation costs for stock options are recognised on the basis of generally accepted accounting principles and in accordance with the guidelines of Securities and Exchange Board of India, and, are measured as the excess of the fair value of the Company’s stock on the stock options grant date over the amount an employee must pay to acquire the stock and recognised in a graded manner on the basis of weighted period of services over the vesting period of equity shares. The fair value of the options is measured on the basis of an independent valuation performed or the market price in respect of stock options granted. n. Earnings per share The earnings considered in ascertaining the Company’s earnings per share comprise of the net profit after tax for the year. The number of shares used in computing the basic earnings per share is the weighted average number of shares outstanding during the year and are adjusted for bonus shares and sub-division of shares for all years presented in these financial statements. The number of shares used in computing diluted earnings per share comprises the weighted average share considered for deriving basic earnings per share, and also the weighted average number of shares, if any which would have been issued on the conversion of all dilutive potential equity shares.

Where the Company is a Lessor: Assets subject to operating leases are included in ﬁxed assets. Lease incomes are recognised on a straight line basis over the lease term. Costs, including depreciation are recognised as an expense. Initial direct costs such as legal costs, brokerage costs, etc are recognised immediately. Biocon Limited

p. Segment reporting Identiﬁcation of segments: The Company’s operating businesses are organized and managed separately according to the nature of products manufactured/traded, with each segment representing a strategic business unit that offers different products to different markets. The analysis of geographical segments is based on the areas in which the Company’s products are sold.

Intersegment Transfers: The Company generally accounts for inter-segment sales and transfers at an agreed marked-up price.

Allocation of common costs: Common allocable costs are allocated to each segment according to the relative contribution of each segment to the total common costs.

Unallocated items: The Corporate and other segment includes general corporate income and expense items which are not allocated to any business segment. q. Provisions A provision is recognised when an enterprise has a present obligation as a result of past event; it is probable that an outﬂow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reﬂect the current best estimates.

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Biocon Annual Report 2006 Financials 5193 3. Share capital 2006 2005

Authorised: 120,000,000 (March 31, 2005 -- 120,000,000) equity shares of Rs 5 each (March 31, 2005 -- Rs 5 each) 600,000 600,000

Issued, subscribed and paid-up: 100,000,000 (March 31, 2005 -- 100,000,000) equity shares of Rs 5 each (March 31, 2005 -- Rs 5 each), fully paid 500,000 500,000

(a) Of the above equity shares : (i) 30,800 equity shares of Rs 100 each were allotted as fully paid bonus shares by capitalisation of general reserve in the year ended March 31, 1997. (ii) 23,471 equity shares of Rs 100 each were allotted as fully paid-up shares in the year ended March 31, 2000 pursuant to a contract for consideration other than cash. (iii) On October 8, 2001, the Company issued 12,153 equity shares of Rs 100 each to the ESOP Trust under an Employee Stock Option Plan ('ESOP Plan') and the ESOP Trust 350 equity shares of Rs 100 each from certain individuals. (iv) On March 30, 2002, the Company acquired 99.9 per cent equity in Syngene through the issue of 202,780 equity shares of Rs 10 each. The consideration was determined on the basis of a fair valuation, as approved by the statutory authorities in India. The related share premium at Rs 403.8 per equity share has been credited to share premium account. (v) On May 9, 2002, the Company has further issued 15,870 equity shares of Rs 10 each to the Trust under the ESOP Plan. The Trust on October 20, 2003 acquired 2,500 equity shares of Rs 10 each from certain individuals. The total shares issued to the Trust were 7,023,100 equity shares of Rs 5 each of which grants have been made for 3,822,039 equity shares of the Company under the ESOP Plan as at March 31, 2006. [Refer Note 19] (vi) In March 2004, the Company made an IPO of 10,000,000 fresh equity shares of Rs 5 each at a price of Rs 315 per share.

(b) The shareholders at the Extraordinary General Meeting ('EGM') of the Company held on February 25, 2002, approved the sub- division of equity shares of face value of Rs 100 each into ten equity shares of face value of Rs 10 each. The Board of Directors in their meeting held on March 30, 2002 passed a resolution for effecting the sub-division. Subsequent to this sub-division, the authorised equity share capital of Rs 20,000 has been divided into 2,000,000 equity shares of Rs 10 each and the then issued, subscribed and paid-up capital of Rs 18,218 as at March 31, 2002 was divided into 1,821,780 equity shares of Rs 10 each.

(c) The shareholders at the EGM of the Company held on November 11, 2003, approved the sub-division of equity shares of face value of Rs 10 each into 2 equity shares of Rs 5 each and increase in authorised capital from Rs 20,000 to Rs 600,000. Subsequent to this sub-division, the authorised equity share capital of Rs 20,000 has been divided into 4,000,000 equity shares of Rs 5 each and the issued, subscribed and paid -up capital of Rs 18,377, has been divided into 3,675,300 shares of Rs 5 each.

(d) Further, the shareholders at the EGM of the Company held on November 11, 2003 approved the allotment of 86,324,700 equity shares of Rs 5 each as bonus shares in the ratio of 1 : 23.4877958 to the shareholders existing as on November 11, 2003, which was the approved record date for this purpose, by capitalisation of the balance in the proﬁt and loss account of Rs 431,624.

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4. Reserves and surplus 2006 2005

Revaluation Reserve

Balance, beginning of the year 14,302 15,908 Less: Transfer to proﬁt and loss account 1,606 1,606 12,696 14,302

Securities Premium

Balance, beginning / end of the year 3,288,478 3,288,478 3,288,478 3,288,478

ESOP trust Dividend and interest income, net 18,874 5,450

General Reserve Balance, beginning / end of the year 688,793 514,405 Add: Transfer from Proﬁt and Loss Account 133,483 174,388 822,276 688,793

Stock compensation adjustment (See note 2(k) & 19) Stock options outstanding 94,129 94,788 Deletions during the year 2,339 659 91,790 94,129

Less: Deferred employee stock compensation expense 5,130 16,935 86,660 77,194

Balance in proﬁt and loss account 3,301,451 2,385,167

7,530,435 6,459,384

(i) Share premium includes an amount of Rs 81,881 received on the allotment of 202,780 equity shares of Rs 10 each on March 30, 2002 at a premium of Rs 403.8 per equity share (See note 3(a) (iv) (vi) and Rs 3,100,000 received on the allotment of 10,000,000 equity shares pursuant to the Company's IPO in March 2004 [ See Note 3 (a) (vi)].

(ii) Deferred employee stock compensation expense (see Note 19): 2006 2005 Stock compensation expense outstanding 16,935 40,990 Stock options cancelled/forfeited during the year 2,339 659 Stock compensation expense amortised during the year (9,467) (23,396) Closing balance of deferred employee stock compensation expense 9,808 18,253

(iii) The Company on November 11, 2003, issued 86,324,700 bonus shares of Rs 5 each through capitalisation of the balance in the proﬁt and loss account to the extent of Rs 431,624.[See note 3(d)]

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Biocon Annual Report 2006 Financials 5195 5. Secured loans 2006 2005

From banks Cash credit, packing credit, etc. 677,549 493,279 677,549 493,279

(a) Cash credit, packing credit, etc

(i) On May 10, 2004, the Company renewed its total rupee and foreign currency denominated fund based working capital facilities with State Bank of India ('SBI') of Rs 200,000. These facilities are repayable on demand, secured by a pari-passu ﬁrst charge on current assets and carry an interest rate of 2 to 6 per cent per annum for foreign currency denominated loans and 7 to 13 per cent per annum for rupee loans. The Company has utilised Rs 130,007 (March 31, 2005 -- Rs 41,567) as of March 31, 2006 inclusive of foreign currency loans of Rs 128,856 (US$ 2,897) (March 31, 2005 -- Rs 41,245) (US$946) as of March 31, 2006.

(ii) On August 23, 2004, the Company renewed its fund and non fund based working capital facilities with Hongkong and Shanghai Banking Corporation ('HSBC') for Rs 545,000. These facilities are repayable on demand, secured by pari-passu ﬁrst charge on current assets of the Company and carry an interest rate of 2 to 6 percent per annum for foreign currency denominated loans and 5 to 15 per cent per annum for rupee loans. The Company has utilised fund based limits of Rs 239,405 (March 31,2005 -- Rs 305,340) inclusive of foreign currency denominated loans of Rs 218,419 (US$ 4,910) [March 31, 2005 -- Rs 305,340 (US$ 7,000)] as of March 31, 2006.

(iii) On August 26, 2004, the Company renewed its working capital facilities with Canara Bank ('CB') for Rs 200,000. These facilities are repayable on demand, secured by a pari-passu ﬁrst charge on current assets of the Company and carry an interest rate of 2 to 6 per cent for foreign currency denominated loans and 7 to 12 per cent per annum for rupee loans. The Company has utilised Rs 114,586 (March 31, 2005 -- Rs 15,512) as of March 31, 2006 inclusive of foreign currency denominated loans of Rs 112,116 (US$ 2,521 ) [March 31, 2005 -- Rs 14,451 (US$ 331)].

(iv) On March 7, 2005, the Company renewed its working capital facility with Export Import Bank ('EXIM Bank') for Rs 310,000. These facilities are repayable on demand, secured by a pari-passu ﬁrst charge on current assets of the Company and carry an interest rate of 2 to 4 per cent for foreign currency denominated loans and 7 to 12 per cent per annum for rupee loans. The Company has not drawn any amounts at March 31, 2006 and at March 31, 2005.

(v) On November 5, 2004, the Company renewed its fund and non fund based working capital facility with ABN Amro Bank for Rs 230,000. These facilities are repayable on demand, secured by a pari passu second charge on the ﬁxed assets of the Company and carry an interest rate of 2 to 6 per cent for foreign currency denominated loans and 7 to 12 per cent per annum for rupee loans. The Company has utilised Rs 193,551 (March 31, 2005 - Rs 130,860) inclusive of foreign currency denominated loans of Rs192,262 (US$ 4,322) [March 31, 2005 -- Rs 130,860 (US$3,000)] as of March 31, 2006.

(vi) On August 10, 2005 all the above banks have entered into an inter-se agreement for operational convenience for the above working capital limits effecting the modiﬁcation of the above charge and creation of a pari passu charge on the current assets of the Company in favour of all the above banks.

6. Unsecured loans 2006 2005

Deferred payment liability 371,517 270,136 NMITLI - CSIR Loan 1,410 - 372,927 270,136

(i) Under the Industrial Policy of the Government of Karnataka, the Company on November 18, 2000 obtained an order from the Karnataka Sales Tax Authority for allowing deferment of sales tax (including turnover tax) for a period upto 8 years with respect to sales from its Bommasandra manufacturing facility for an amount not exceeding Rs 24,375. As at March 31,2006 the Company has utlised Rs 1,050 (March 31, 2005 -- Rs 929).

(ii) Under the Agro Food Processing Industrial Policy of the Government of Karnataka, the Company on November 18, 2000 obtained an order from the Karnataka Sales Tax Authority for allowing deferment of sales tax (including turnover tax) for a period upto 12 years with respect to sales from its Hebbagodi manufacturing facility for an amount not exceeding Rs 648,938. As at March 31, 2006, the Company has utilised Rs 370,467 (March 31, 2005 -- Rs 269,207 ).

(iii) On March 31, 2005, the Company entered into an agreement with the Council of Sceintiﬁc and Industrial Research ('CSIR'), for an unsecured loan of Rs 4,030 for carrying out part of the research and development project under the New Millenium Indian Technology Leadership Initiative ('NMITLI') Scheme. The ﬁrst instalment of Rs 1,410 (March 31, 2005 - Rs Nil) was released on signing the agreement. The second and third instalment of Rs 1,410 and Rs 1,210 will be released after one year and two years respectively from the date of the agreement. The loans are repayable over 10 annual equal installments starting from October 1, 2008 and carry an interest rate of 3 percent per annum. Biocon Limited

7. Deferred tax liability Deferred tax (asset)liability Current year Defferred tax (asset) liability as at April 1, 2005 charge/ (credit) as at March 31, 2006

Depreciation 237,756 65,642 303,398 Employee retirement beneﬁts (12,410) (4,632) (17,042) Provisions for doubtful debts (5,642) (868) (6,510) Others (107) (1) (108)

219,597 60,141 279,738 Year ended March 31, 2005 176,680 42,917 219,597

(i) The Company effective August 26, 2003 received approval from the Cochin Special Economic Zone for the setting up of a 100 percent Export oriented Unit (‘EOU’) for the manufacture and export of all types of statins on which, the Company claims exemption under section 10B of the Income-tax Act, 1961 (‘IT Act’)

(ii) In accordance with the provisions of section 10B of the IT Act, effective August 26, 2003, the Company can avail of a tax deduction in respect of 100 per cent of all export income derived from the export sales arising out of its EOUs. Accordingly, the Company, has not recognised any additional deferred tax liability for this EOU as it expects the timing differences originating in this period to reverse out during the tax holiday period.

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Biocon Annual Report 2006 Financials 5197 8. Fixed assets Balance at the beginning Additions during Deletions during the Balance at the end of of the year the year year the year Cost/Valuation Land Freehold (revalued) 8,967 - - 8,967 Freehold (others) 52,088 - - 52,088 Leasehold 169,950 - - 169,950 Buildings (revalued) 16,561 - - 16,561 Buildings (others) 401,289 22,878 - 424,167 Leasehold improvements - 3,191 - 3,191 Plant and machinery 1,697,659 227,879 - 1,925,538 Research and development equipment 311,228 197,241 - 508,469 Furniture and ﬁxtures 34,567 6,399 - 40,966 Vehicles 9,708 2,494 1,038 11,164 2,702,017 460,082 1,038 3,161,061 Year ended March 31, 2005 1,912,290 789,727 - 2,702,017

Accumulated depreciation

Buildings (revalued) 11,226 2,409 - 13,635 Buildings (others) 61,535 15,482 - 77,017 Leasehold improvements - 159 - 159 Plant and machinery 485,054 168,975 - 654,029 Research and development equipment 77,976 35,454 - 113,430 Furniture and ﬁxtures 14,198 5,752 - 19,950 Vehicles 3,732 1,870 884 4,718 653,721 230,101 884 882,938 Year ended March 31, 2005 471,200 182,521 - 653,721

Net book value Land Freehold (revalued) 8,967 8,967 Freehold (others) 52,088 52,088 Leasehold 169,950 169,950 Buildings (revalued) 5,335 2,926 Buildings (others) 339,754 347,150 Leasehold improvements - 3,032 Plant and machinery 1,212,605 1,271,509 Research and development equipment 233,252 395,039 Furniture and ﬁxtures 20,369 21,016 Vehicles 5,976 6,446 2,048,296 2,278,123 Year ended March 31, 2005 1,441,090 2,048,296

Notes: (a) Certain freehold land and buildings were revalued on November 1, 1994, based on the estimated replacement cost after considering depreciation upto that date, as per valuers reports and the resultant surplus of Rs 34,529 was credited to revaluation reserve. Of this reserve, Rs 21,833 (March 31, 2005 -- Rs 20,227) has been transferred to the proﬁt and loss account for depreciation on these assets or adjustd on the sale of these assets.

(b) The Company has adjusted net foreign exchange losses of Rs 867 (March 31, 2005 -- Rs Nil) in capital work in progress / ﬁxed assets capitalised during the year

(c) On December 5, 2002, Karnataka Industrial Areas Development Board ('KIADB') allotted land aggregating 26.75 acres to the Company for Rs 64,200 on a lease-cum sale basis for a period of 6 years. In addition, during the year ended March 31, 2005, the Company acquired an additional 41.25 acres of land for Rs 99,417 from KIADB. One of the key conditions include commencement of commercial operations by the Company within 24 months of taking possession, which the Company believes has been complied with by the commencement of operations by Syngene on this land on October 21, 2004. During the quarter ended June 30, 2005, the Company has paid an advance of Rs 56,320 towards allotment of additional 22 acres of land, offered to the Company by KIADB on December 20, 2003. The Company has received the possession certiﬁcate from KIADB in January 2006 and is in the process of getting the land registered.

(d) The Company has taken a house property on lease for a term of 10 years at a monthly rental of Rs 15. from P K Associates. The Company has incurred an amount of Rs 3,191 on the leasehold improvements on this house property (Refer Note 22) Biocon Limited

9. Investments 2006 2005

Long term investments (At cost) A) Non trade: Unquoted National Savings Certiﬁcates 13 13 13 13 B) Trade investment: In subsidiary companies: Unquoted and fully paid up 50,000 (March 31, 2005 -- 50,000) equity shares of Rs 10 each of Clinigene 500 500 2,874,830 (March 31, 2005 -- 2,874,830) equity shares of Rs 10 each of Syngene 84,328 84,328 In Joint Venture Company: Unquoted and fully paid up 4,488,000 (March 31, 2005 - 2,244,000) equity shares of Rs 10 each of BBPL 44,880 22,440 Advance towards share capital 22,440 - Inter corporate deposits to Subsidiary / Joint Venture Companies 722,822 192,703 In Other Companies: Unquoted and fully paid up 3% Convertible Promissory Note of US$ 5,150,000 (March 31, 2005 - US$ 1,000,000) in Nobex Corporation, USA [ Refer Note 1(b) and (i) below ] 226,274 43,966 3% Series B Convertible Promissory Note of US$ 3,000,000 (March 31, 2005 - US$ 1,000,000) in Vaccinex Inc., USA 131,930 44,735 2,000,000 (March 31, 2005 - 2,000,000) Common Stock at US$ 0.50 each, fully paid, par value US$ 0.001 each of Nobex Corporation, USA [ Refer Note 1(b) and (i) below ] 45,640 45,640 645,161 (March 31, 2005 - 645,161) Series B1 Preferred Stock at US$ 1.55 each, fully paid, par value US $0.01 each of Vaccinex Inc., USA 45,100 45,100 Advance to Nobex Corporation, USA [ Refer Note 1(b) and (i) below ] 66,627 - 1,390,541 479,412

(i) (a) On December 1, 2005 Nobex has ﬁled for bankruptcy under Chapter 11 of the US Brankruptcy laws, the status of the bankruptcy proceedings and the recoverability of the investments is more fully discussed in Note 1(b).

(b) The Company has entered into an ‘Investment Agreement’ with Nobex Corporation, USA ('Nobex') on October 20, 2004 to invest an amount of US$ 3.3 Million (US$ 1 Million in Common Stock and US$ 2.3 Million in Convertible Promissory Notes). Further, the Company has entered into a ‘Oral Insulin Joint Product Development Agreement’ for development and commercialization of the Oral Insulin Product. In addition, Biocon will get the warrants of US$ 4.4 Million convertible into US$ 3.3 Million worth of common stock.As on March 31, 2006, the Company has invested Rs 45,640 (US$ 1 Million) (March 31, 2005 - US$ 1 Million) towards purchase of common stock, an amount of Rs 87,698 (US$ 2.00 millon) ( March 31, 2005 - US$ 1.0 Million) towards the convertible promissory note and has received the warrants entitling it to subscribe for 1.33 Million common stock at an exercise price of US$ 0.75 each.

(c) The Company has also entered into an 'Investment Agreement' with Nobex Corporation, USA on April 25, 2005 to invest an amount of US$ 3.15 Million in Convertible Promissory Notes. Further, the Company has entered into an 'BNP Joint Product Development Agreement' for development and commercialization of the Oral BNP Product. As on March 31, 2006 the Company has invested Rs 138,576 (US$ 3.15 Million) towards purchase of the convertible promissory notes. Further, the Company has paid Rs 12 Million towards license fee for distribution rights of Oral Insulin on its commercialization ; and consequent to the ﬁling of the bankruptcy charge under Chapter 11 of the US Bankruptcy laws, the Company has agreed to be a debtor in possession to facilitate the orderly sale of assets of Nobex and committed to fund Nobex for a total sum of USD 1.4 Million under the Loan and Security Agreement ('the agreement') dated December 1, 2005. This amount shall be fully recovered on ﬁrst priority basis against the sale of assets of Nobex. As on March 31, 2006, the Company has funded a sum of Rs 54 Million (Refer Schedule 13).

(ii) The Company has entered into a ‘Securities Purchase Agreement’ with Vaccinex Inc., USA ('Vaccinex') on November 3, 2004 to invest an amount of US$ 4 Million (US$ 1 Million in Series B1 Convertible Preferred Stock and US$ 3 Million in Series B Convertible Promissory Notes). Further, the Company has entered into a ‘Research and Collaboration Agreement’ to discover, develop, and commercialize human therapeutic monoclonal antibodies. As on March 31, 2006 the Company has invested Rs 45,100 (US$ 1 Million) in the convertible preferred stock and an amount of Rs 131,930 (US$ 3 Million) in the convertible promissory note.

Vaccinex has incurred a loss of US$ 5.5 Million for the year ended December 31, 2005. In addition, the networth of Vaccinex is fully eroded at the balance sheet date. Further, Vaccinex has budgeted its funding requirements over a period of next three years to commence its development plan As Vaccinex is a development stage enterprise and of strategic importance to the Company, it believes that there is no permanent dimunition in the value of this investment. In accordance with Accounting Standard - 9, considering the above, the Company has not recognised interest income accrued on the promissory notes.

Biocon Annual Report 2006 Financials 5199 (iii) Clinigene, incorporated on August 4, 2000, is engaged in undertaking clinical research activities and has entered into contracts with domestic and international companies to undertake research activities with respect to chronic diseases and a 100 per cent subsidiary of the Company. In the current period, Clinigene has incurred losses of Rs 11,109 (March 31, 2005 - Rs 29,453) resulting in a negative net worth of Rs 61,255 (March 31, 2005 - Rs 50,146) at March 31, 2006. In addition, the Company has granted a long term unsecured interest free loan of Rs 261,625 (March 31, 2005 - Rs 90,138) repayable within 6 years to Clinigene to fund its operations [(See Note 13 (i)]. The management of Clinigene is making aggressive marketing efforts to expand its clinical research activities. The Company believes that this dimunition in the value of its investment is only temporary and efforts for certain ﬁnancial restructuring is in progress, accordingly, no provision is made in these ﬁnancial statements.

(iv) BBPL is a 51% joint venture between the Company and CIMAB SA, engaged in research, development, manufacturing and marketing of Biopharmaceuticals. At March 31, 2006, the aggregate amount of Biocon's interest in the assets and liabilities of BBPL is Rs 354,881 ( March 31, 2005 - Rs 70,901) and Rs 86,201 (March 31, 2005 - Rs 9,484) respectively. Further, the Company has granted a long term loan of Rs 461,197 ( March 31, 2005 - Rs 102,565 to fund the operations of BBPL and charged interest on all such funding. [See Note 22 and 13(ii)]. On March 31,2006, the Company has made an advance of Rs 22,440 towards share application money and has subsequently, on April 1, 2006 been allotted equity shares against the said advance. As BBPL is in the development stage, the management believes that there is no permanent dimunition in the value of its investment.

Other Investments 2006 2005 C) Current and unquoted (at lower of cost and fair market value) Nil units (March 31, 2005-- 8,511,266) of Rs 10 each in HSBC Cash Fund [Market Value Rs Nil (March 31, 2005 -- Rs 85,241)] - 85,241 Nil units (March 31, 2005 -- 4,085,713) of Rs 10 each in CanLiquid Fund [Market Value Rs Nil (March 31, 2005 -- Rs 41,025)] - 41,025 - 126,266 The following investments were purchased and sold during the year Purchase and Sale of Nil units (March 31, 2005 - 1,874,055) of Rs 10 each in ING Vysya Liquid Fund - 20,190 Purchase and Sale of Nil units (March 31, 2005--3,022,418) of Rs 10 each in DSP Merrill Lynch Fund - 30,254 Purchase and Sale of Nil units (March 31, 2005--3,730,184) of Rs 10 each in LIC Liquid Fund - 40,245 Purchase and Sale of Nil units (March 31, 2005--3,019,010) of Rs 10 each in Principal Asset Management Fund - 30,201 Purchase and Sale of Nil units (March 31, 2005--30,912) of Rs 1,000 each in Franklin Templeton Fund - 40,246 Purchase and Sale of 7,691 units (March 31, 2005--Nil) of Rs 10 each in Canara Bank Mutual Fund 77 - Purchase and Sale of 2,501,525 units (March 31, 2005--Nil) of Rs 10 each in ABN Amro Mutual Fund 25,015 - Purchase and Sale of Nil units (March 31, 2005--945,539) of Rs 10 each in HDFC Management Fund - 10,057 Purchase and Sale of Nil units (March 31,2005--3,017,595) of Rs 10 each in IL&FS Liquid Fund - 30,176 Purchase and Sale of 53,517,483 units (March 31, 2005 - 125,626,849) units of Rs 10 each in HSBC Cash Fund 535,475 1,287,407

D) Current and unquoted (at lower of cost and fair market value), from IPO funds Nil units (March 31, 2005 -- 4,169,132) of Rs 10 each in Birla Cash Manager - 41,698 [Market Value Rs Nil (March 31, 2005 -- Rs 41,698)] Nil units (March 31, 2005 -- 5,012,424) of Rs 10 each in ABN Amro Liquid Fund - 50,124 [Market Value Rs Nil (March 31, 2005 -- Rs 50,124)] Nil units (March 31, 2005 -- 5,227,376) of Rs 10 each in Can Liquid Fund - 52,488 [Market Value Rs Nil (March 31, 2005 -- Rs 52,488)] Nil units (March 31, 2005 -- 10,393,287) of Rs 10 each in Grindlays Cash Fund - 104,007 [Market Value Rs Nil (March 31, 2005 -- Rs104,040] Nil units (March 31, 2005 -- 20,000,867) of Rs 10 each in HSBC Cash Fund - 200,090 [Market Value Rs Nil (March 31, 2005 -- Rs 200,329)] Nil units (March 31, 2005 -- 5,208,656) of Rs 10 each in ING Vysya Liquid Fund - 52,220 [Market Value Rs Nil (March 31, 2005 -- Rs 52,253)] Nil units (March 31, 2005 -- 30,495,573) of Rs 10 each in Kotak Mutual fund - 305,724 [Market Value Rs Nil (March 31, 2005 -- Rs 305,880)] Nil units (March 31, 2005 -- 8,060,298) of Rs 10 each in LIC Liquid Fund - 87,085 [Market Value Rs Nil (March 31, 2005 -- Rs 87,592)] Nil units (March 31, 2005 -- 22,711,805 ) of Rs 10 each in Prudential ICICI Liquid Plan - 269,313 [Market Value Rs Nil (March 31, 2005 -- Rs 269,313)] Nil units (March 31, 2005 -- 11,584,659) of Rs 10 each in Principal Cash Management Fund - 115,862 [Market Value Rs Nil (March 31, 2005 -- Rs 115,862] Nil units (March 31, 2005 -- 32,650,510 ) of Rs 10 each in Reliance Liquid Fund - 498,831 [Market Value Rs Nil (March 31, 2005 -- Rs 498,889)] Nil units (March 31, 2005 -- 42,129) of Rs 1000 each in TATA Liquid Fund - 46,915 [Market Value Rs Nil (March 31, 2005-- Rs 47,304)] - 1,824,357 - 1,950,623 1,390,554 2,430,048 Biocon Limited

The following investments were purchased and sold during the year - for the IPO funds 2006 2005

Purchase and Sale of 5,449,794 units (March 31, 2005 -- 37,507,795) of Rs 10 each in Birla Cash Manager 54,516 375,318 Purchase and Sale of 18,584 units (March 31, 2005 -- 61,517,500) of Rs 10 each in Can Liquid Fund 187 617,750 Purchase and Sale of 5,454,256 units (March 31, 2005 -- 45,067,411) of Rs 10 each in Deutsche Insta Cash Plus Fund 56,184 454,489 Purchase and Sale of Nil units (March 31,2005--29,502,924) of Rs 10 each in DSP Merrill Lynch Liquidity Fund - 354,014 Purchase and Sale of 24,690 units (March 31,2005-- 40,917,600) of Rs 10 each in Grindlays Cash Fund 246 409,472 Purchase and Sale of Nil units (March 31, 2005-- 8,543,943) of Rs 10 each in HDFC Cash Management Fund - 90,845 Purchase and Sale of 14,660,189 units (March 31,2005--141,237,540) of Rs 10 each in HSBC Cash Fund 146,808 1,439,750 Purchase and Sale of 4,088,839 units (March 31, 2005--26,320,956) of Rs 10 each in ING Vysya Liquid Fund 40,961 271,420 Purchase and Sale of 5,594,845 units (March 31, 2005--324,23,604) of Rs 10 each in JM High Liquidity Fund 56,041 324,601 Purchase and Sale of Nil units (March 31, 2005--1,411,911) of Rs 1,000 each in Franklin Templeton Mutual Fund - 1,550,323 Purchase and Sale of 465,086 units (March 31, 2005--21,679,401)of Rs 10 each in Kotak Mutual Fund 4,828 240,820 Purchase and Sale of 39,884 units (March 31, 2005--16,451,017) of Rs 10 each in LIC Mutual Fund 434 178,018 Purchase and Sale of 189,082 units (March 31, 2005--42,492,920) of Rs 10 each in ICICI Prudential Fund 2,226 503,651 Purchase and Sale of 5,570,786 units (March 31, 2005--29,889,448) of Rs 10 each in Principal Cash Management Fund 55,783 298,975 Purchase and Sale of 719 units (March 31, 2005--27,164,543) of Rs 1,000 each in TATA Liquid Fund 1,565 353,512 Purchase and Sale of 16,193,474 units (March 31,2005--55,083,311) of Rs 10 each in Reliance Liquid Fund 215,554 841,352 Purchase and Sale of 7,223 units (March 31, 2005--10,025,245) of Rs 10 each in ABN AMRO Liquid Fund 72 100,252 Purchase and Sale of 31,421,615 units (March 31, 2005--167,762,418) of Rs 10 each in Reliance Fixed Maturity Plan 314,220 1,712,490

Included under inter corporate deposits are amounts due from: (i) Subsidiary Company Clinigene 261,625 90,138 Maximum amount outstanding at any time during the period /year 261,625 90,138 The Company has entered into an agreement with Clinigene, for an interest-free loan not exceeding Rs 300 Million, to support its operational costs and capital expenditure and repayable over a period of 6 years.

(ii) Joint Venture Company Biocon Biopharmaceuticals Private Limited 461,197 102,565 Maximum amount outstanding at any time during the year 472,221 102,565 The Company has entered into an agreement with BBPL, for an unsecured loan not exceeding Rs 900 Million and carrying an interest rate of 6 per cent per annum, to support its operational costs and capital expenditure and repayable over a period of 5 years from the date of commercialisation of its project.

10. Inventories Raw materials 431,014 309,429 Goods-in-bond / goods-in-transit (Raw materials) 23,050 16,119 Packing materials 7,896 4,242 Work-in-progress 522,302 360,403 Finished goods 68,821 22,729 1,053,083 712,922 The inventories of Raw materials and Work-in-progress include trial run inventory of Rs 138,134 at Biocon Park, as the project is yet to commercialise its operations (Refer Note 1).

[THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK]

Biocon Annual Report 2006 Financials 101 51 11. Sundry debtors (unsecured) 2006 2005

Debts outstanding for a period exceeding six-months Considered good 50,292 6,443 Considered doubtful 19,785 17,207 Other debts Considered good 2,010,077 1,722,399 2,080,154 1,746,049 Less: Provision for doubtful debts 19,785 17,207 2,060,369 1,728,842

12. Cash and bank balances

Cash on hand 1,218 1,410 Balances with scheduled banks: In current accounts 2,541 18,476 In deposit accounts 16,276 14,315 20,035 34,201

(a) Deposit account includes a deposit made of Rs Nil (March 31, 2005 - Rs 10,000) under the ﬂexi-deposit account allowing the Company to avail overdraft facility of Rs Nil (March 31, 2005 -- Rs 10,000) at an interest rate of 2 per cent above the ﬁxed deposit rate. The Company has drawn Rs Nil (March 31, 2005 -- Rs Nil) against this facility as at March 31, 2006.

(b) Balances with scheduled banks in current accounts include balance in unclaimed dividend account of Rs 725 (March 31, 2005 - Rs 252).

(c) Balances with scheduled banks in current accounts and deposit account include the balances of the ESOP Trust of Rs 1,298 (March 31, 2005 - Rs 143) and Rs 16,276 (March 31, 2005 -- Rs 4,315), respectively.

13. Loans and advances (Unsecured and considered good) 2006 2005

Advances recoverable in cash or in kind or for value to be received 40,222 29,958 Duty drawback receivable, net of provision of Rs 534 (March 31, 2005 Rs 1,446) 23,101 26,772 Deposits 37,822 35,372 Balances with Customs, Excise and Sales Tax Authorities 110,085 72,973 Advance income-tax, net of provision - 4,132 Shares held by ESOP trust 905 935 212,135 170,142 Included under advances recoverable in cash or in kind or for value to be received are amounts due from: (i) Subsidiary Company Clinigene - - Maximum amount outstanding at any time during the period / year - 46,988

(ii) Joint Venture Company Biocon Biopharmaceuticals Private Limited - - Maximum amount outstanding at any time during the period /year - 19,964

(iii) Biocon India Limited Employees Welfare Trust - - Maximum amount outstanding at any time during the year - 1,259 Biocon Limited

14. Current liabilities and provisions 2006 2005 Current liabilities Sundry Creditors Capital 676,527 987,126 Others 984,477 831,611 Advances from customers 22,691 50,401 Interest accrued but not due 36 201 Investor Education and Protection Fund shall be credited by - Unclaimed dividend 725 252 Other liabilities 134,434 83,107 1,818,890 1,952,698

Provisions for Proposed dividend 250,000 200,000 Tax on proposed dividend 35,063 28,050 Gratuity 11,681 17,543 Superannuation 2,536 17,568 Bonus 20,000 26,500 Leave encashment 52,564 39,722 Provision for taxation, net of advance tax 27,217 - 399,061 329,383 2,217,951 2,282,081

(a) Other liabilities include Rs 1,073 (March 31, 2005 -- Rs 4,596) due to Ms Kiran Mazumdar Shaw, Managing Director and Rs Nil (March 31, 2005 -- Rs Nil) to Mr JMM Shaw, Director and the maximum amount outstanding at any time during the period was Rs 5,530 (March 31, 2005 - Rs 4,596) and Rs.366 (March 31, 2005 - Rs 366) respectively.

(b) Provision for tax includes provision for fringe beneﬁt tax of Rs 450 (Refer Note 21)

(d) Dues to small scale industrial undertaking included in Sundry creditors: 16,784 5,657

The names of small-scale industrial undertakings to whom amounts are outstanding for more than 30 days: a. Acme Synthetic Chemicals b. Cauvery Mineral Water Private Limited c. Drawcans Private Limited d. Eskay Fine Chemicals e. Quantum Drugs & Chemicals f. Ragukul Industries g. Speciality Organics Private Limited

15. Other income 2006 2005

Interest income from investments [gross of tax deducted at source - Rs 3,692 (2005 - Rs 423)] 15,786 5,117 Dividend earned On investment of IPO funds 21,508 109,779 Others 568 3,032 Gain on investments sold, net 1,835 1,862 Gain on ﬁxed assets sold, net 346 Write back of liability - 13,185 Miscellaneous income 16,8 68 23,538 56,911 156,513

Biocon Annual Report 2006 Financials 103 51 16. Manufacturing, contract research and other expenses 2006 2005

Raw materials consumed, net of duty drawback of Rs 41,356 ( 2005 - Rs 40,758) 3,911,555 3,443,920 Purchase of goods for resale 86,545 28,046 Employee costs Salaries, wages, bonus, etc 337,250 312,907 Group's contribution to provident and other fund 17,379 14,404 Gratuity, superannuation, leave encashment 23,016 42,824 Employee stock compensation expense (See Note 4 & 19) 9,467 23,396 Directors sitting fees 730 500 Welfare expenses 33,488 26,904 Operation and other expenses: Royalty and technical fees 4,768 1,087 Rent 2,321 2,170 Communication expenses 23,293 22,437 Travelling and conveyance 65,071 61,028 Professional charges 39,939 40,521 Power and fuel, net of recoveries of Rs 28,727 ( 2005 - Rs 8,909) 307,847 245,990 Insurance 13,144 12,765 Rates, taxes and fees 3,095 6,540 Lab consumables 33,373 22,203 Repairs and maintenance Plant and machinery 57,172 72,138 Buildings 7,502 14,257 Others 24,483 18,175 Selling expenses Freight outwards and clearing charges 47,607 40,102 Sales promotion expenses 56,380 31,918 Commission and brokerage (other than sole selling agents) 59,652 52,709 Bad debts written off 1,490 - Provision for bad and doubtful debts 2,578 2,443 Exchange ﬂuctuation (net) (21,802) (24,620) Loss/(gain) on forward cover contracts, net 25,059 (5,340) Printing and stationery 6,372 10,731 Provision for dimunition of investments - 121 Miscellaneous expenses 106,935 45,814 5,285,709 4,566,090 (Increase)/decrease in inventories of ﬁnished goods and work-in-progress: Opening inventories: Finished goods 22,729 17,383 Work-in-progress 360,403 335,329 383,132 352,712 Closing inventories: Finished goods (68,821) (22,729) Work-in-progress (522,302) (360,403) (591,123) (383,132) (207,991) (30,420) 5,077,718 4,535,670 Note : Power and fuel cost of Rs 185,606 ( 2005 - Rs Nil) and employee costs of Rs 35,513 (2005 - Rs Nil) for the year ended March 31, 2006 have been transferred to capital work in progress, which include salaries, wages and bonus - Rs 33,134 ; Contribution to provident and other funds - Rs 872 ; Gratuity and leave encashment - Rs 1,507 as it relates to construction and installation of new facility at the Biocon Park.

Legal and professional charges of Rs 20,977 ( 2005 - Rs Nil) identiﬁable to acquisition of intellectual property rights ('IPRs') have been transferred to capital work in progress. Biocon Limited

17. Research and development expenses

Research and development expenses aggregate to Rs 400,746 (March 31, 2005 - Rs 245,526) and include Rs 197,241 (Rs 99,900) on research and development equipment and Rs 18,327 (March 31, 2005 - Rs 3,466) on buildings and the remaining expenses incurred by the Company have been disclosed under the appropriate account heads [Refer Note 24(viii)].

18. Interest and ﬁnance charges 2006 2005

Interest paid on : Others 16,628 18,511 16,628 18,511 Less : Interest received from suppliers [gross of tax dedcution at source Rs 54 (2005 - Rs Nil) ] (7,927) (6,932) 8,701 11,579 Bank charges 8,186 8,352 16,887 19,931

19. Employee stock compensation

On September 27, 2001, Biocon's Board of Directors approved the Biocon Employee Stock Option Plan ('ESOP Plan 2000') for the grant of stock options to the employees of the Group. A compensation committee has been constituted to administer the plan through the ESOP Trust.

The Trust purchases equity shares of Biocon using the proceeds from the loan obtained from Biocon and will subscribe to such number of shares as is necessary for transferring to the employees. The total number of equity shares transferred to the Trust shall not exceed 250,000 equity shares (pre-bonus and pre-split) of Rs 10 each and shares transferred to each employee will not exceed 10,000 equity shares (pre-bonus and pre-split) of Rs 10 each. The Compensation Committee shall determine the exercise price which will not be less than the face value of the shares. The Compensation Committee had granted 71,510 options under the ESOP Plan 2000 to be exercised at a grant price of Rs 10 (pre-bonus and pre-split). The options will vest with the employees equally over a four year period from the grant date. In case the emplo... yee resigns from employment, the rights relating to shares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balance shares shall be forfeited in favour of the ESOP Trust.

Further, during the year ended March 31, 2005 the Compensation Committee has granted 142,100 options under the ESOP Plan 2000 effective January 1, 2004 to be exercised at a grant price of Rs 5. The options vest with the employees equally over a four year period from January 1, 2005.

On January 18, 2004, the Board of Directors announced the Biocon Employees Stock Option Plan (ESOP Plan 2004) for the grant of stock options to the employes of the Company, pursuant to which, the Compensation Committee on March 19, 2004 granted 422,000 options under the ESOP Plan 2004 to be exercised at a grant price of Rs 315 being the issue price determined for the IPO through the book building process. The options will vest with the employees equally over a four year period from April 1, 2005.

The Securities and Exchange Board of India ('SEBI') has issued the Employee Stock Option Scheme and Stock Purchase Guidelines, 1999 ('SEBI guidelines') which are applicable to stock option schemes for employees, of all listed companies. Biocon, though not listed on the date of the grants has followed these guidelines for accounting of ESOP costs [Refer Note 2]. In accordance with these guidelines, the excess of market price of the underlying equity shares on the date of the grant of the stock options over the exercise price of the options is to be recognised in the books of account and amortised over the vesting period. For basic EPS purposes, the shares outstanding including the options exercised by the employees have been considered [Refer Note 2(k)]. For diluted EPS purpose, the shares, which are not yet eligible for exercise, have also been considered as outstanding to the extent these shares are diluted.

Biocon Annual Report 2006 Financials 105 51 The Trust had 4,432,567 (March 31, 2005 -- 5,402,189) equity shares of Rs 5 each as at March 31, 2006 and a summary of the activity of the Trust is as follows :

Particulars 2006 2005

Opening balance of equity shares not granted to employees and available with the Trust 3,138,332 3,082,240 Add: Options cancelled and lapsed during the year 70,383 56,092 Closing balance of shares not granted to employees and available with the Trust 3,208,715 3,138,332

Options granted and exercised at end of year 2,590,533 1,620,911 Options granted and eligible for exercise at end of year 235,200 97,952 Options granted but not eligible for exercise at end of year 988,652 2,165,905

Total employee stock compensation cost as at end of year 91,790 94,129

Vesting period of options -- Primarily progressively over four years

Employee stock compensation expense -- Amortised during theyear 9,467 23,396

The estimated fair values of the equity shares have been determined by management on the dates of the grants for ESOP 2000 based on a valuation by an independent appraiser. As per the terms of the ESOP Plan 2004, the exercise price equals the price determined for the IPO through the book building process for the options granted on March 19, 2004. Accordingly no compensation cost has been recorded, as the exercise price equals the fair value of the shares on the date of the IPO.

20. Reconciliation of basic and diluted shares used in computing earning per share 2006 2005

Basic weighted average shares outstanding 95,567,448 94,597,811 Add: Effect of dilutive shares granted but not exercised / not eligible for exercise 1,223,852 2,263,857 Weighted average shares outstanding and potential shares outstanding 96,791,300 96,861,668

21. Current taxes

The current tax charge of Rs 208,633 (March 31, 2005 - Rs 98,298) is based on the earnings for the year ended March 31, 2006. In addition, the Company has, during the year, provided Rs 5,130 towards fringe beneﬁt tax as introduced by the Government under the Finance Act, 2005. Biocon Limited

------450 600 (590) 2,400 (4,596) (1,050) 90,138 102,565 Balance as at March 31, 2005 March (Payable)/receivable - - - - - 480 240 600 708 600 (450) (300) (590) 9,593 1,680 8,909 2,400 2,925 10,261 90,138 98,932 (46,988) (19,694) April 1, 2004 to March 31, 2005 to March ------(590) (1,073) (1,050) 261,625 461,197 Balance as at March 31, 2006 March (Payable)/receivable - - - - - 35 90 779 600 480 240 600 157 2,664 9,384 1,494 2,599 2,400 15,406 10,339 28,247 169,560 338,548 March 31, 2006 March April 1, 2005 to Salary and perquisites Salary and perquisites Unsecured Loan Unsecured Rent deposit received Loan Unsecured Interest income on unsecured loan income on unsecured Interest Description Rent income Rent deposit Power and water charges Insurance Charges Management charges Power charges Rent income Management charges Insurance Charges Rent income Insurance Charges Personnel Deputation Charges a/c BBPL on current Due from Lease Rentals Current account: Current a/c Clinigene on current Due from Management charges received Professional charges Professional Managing Director Director Joint Venture Relative of Director Relationship Subsidiary Company Subsidiary Company Company

Kiran Mazumdar Shaw JMM Shaw Syngene Clinigene Biocon Biopharmaceuticals Private Limited P K Associates International Private Limited International Private Limited Name of the related party Name of the related 1 2 3 4 5 6 The Company has given corporate guarantees of Rs 217,500 (March 31, 2005 - Rs 217,500) to the Customs and Excise department ('CED') on behalf of Syngene has furnished The Company has given corporate guarantees of Rs 217,500 (March a 31, 2005 - Rs 46,239) to the Customs and Excise Department ('CED') on behalf of BBPL. The Company has given corporate guarantee of Rs 131,323 (March Sl No The accumulated compensation cost upto the year ended March 31, 2006 include Rs 22,208 (March 31, 2005 -- Rs 22,208) incurred towards employee compensation cost for options granted to employees of towards 31, 2005 -- Rs 22,208) incurred 31, 2006 include Rs 22,208 (March The accumulated compensation cost upto the year ended March 31, 2005 - Rs Nil) to the Customs and Excise Department ('CED') on behalf of Clinigene. The Company has given corporate guarantee of Rs 4,976 (March Effective January 1, 2004, the Company has entered into an agreement with Syngene, Clinigene and BBPL to provide general management support, for which an agreed upon management charge has been general management support, for which an agreed with Syngene, Clinigene and BBPL to provide into an agreement January 1, 2004, the Company has entered Effective Syngene and Clinigene. The corresponding compensation cost amortised during the year is Rs 9,466 (March 31, 2005 -- Rs 5,677). The Company has not charged this amortisation to Syngene and Clinigene. compensation cost amortised during the year is Rs 9,466 (March Syngene and Clinigene. The corresponding 22. Related party transactions (a) (b) (c) levied. (d) (e) guarantee of Rs 315,000 (March 31, 2005 -- Rs 315,000) on behalf of the Company to CED. guarantee of Rs 315,000 (March

Biocon Annual Report 2006 Financials 107 51 23. Provisions Balance at the Additions Amount paid Balance at the beginning of the year during the year during the year end of the year Leave encashment 39,722 12,842 - 52,564 Bonus 26,500 45,260 51,760 20,000 Superannuation 17,568 - 15,032 2,536 Gratuity 17,543 11,681 17,543 11,681 Proposed dividend 200,000 250,000 200,000 250,000 Tax on proposed dividend 28,050 35,063 28,050 35,063 329,383 354,846 312,385 371,844

24. Supplementary proﬁt and loss data 2006 2005

(i) Payments to auditors (included in professional and consultancy charges) a) Statutory audit 1,400 1,300 b) Tax audit 100 100 c) Reimbursement of out-of-pocket expenses 99 175 1,599 1,575 (ii) Managerial remuneration a) Remuneration to Managing Director Salary 7,018 6492 Perquisites 1,216 930 Contribution to provident fund 392 881 Bonus 1,713 1,958 10,339 10,261 b) Remuneration to whole-time Director Salary 7,018 6492 Perquisites 653 653 Bonus 1,713 1,958 9,384 9,103 c) Computation of net proﬁts in accordance with Section 349 of the Act

Net profit for the year before tax 1,608,734 1,885,095 Add: Depreciation provided in the accounts 228,496 180,915 Managerial remuneration 19,723 19,364 Directors sitting fees 730 500 Provision for bad and doubtful debts 2,578 2,443 1,860,261 2,088,317 Less: Depreciation under Section 350 of the Act 228,496 180,915 Profit on sale of assets 346 1,862 Profit on sale of investment 1,835 - 230,677 182,777

Net Proﬁt for Section 198 of the Act 1,629,584 1,905,540 Maximum remuneration payable to directors 162,958 190,554 Remuneration paid to Managing Director 10,339 10,261 Remuneration paid to whole time Director 9,384 9,103

As the future liability for gratuity and leave encashment is provided on an actuarial basis for the Company as a whole, the amount pertaining to the directors is not ascertainable and, therefore, not included above. Biocon Limited

(iii) Information pursuant to the provisions of paragraphs 3, 4C and 4D of Part II of Schedule VI of the Companies Act, 1956 ('the Act'): a) Licensed capacity, installed capacity and actual production : Class of Goods Actual Production Licensed Installed Curent Previous Capacity Kg Capacity Kg Year Kg. Year kg. Biochemicals: Enzymes * ** 4,021,221 3,595,428 Pharmaceutical * ** 6,495,665 4,112,542

* Exempted from the licensing provisions of the Industries (Development and Regulation) Act, 1951 in terms of notiﬁcation No.S.O.477(E) dated July 25, 1991.

** Installed capacity has not been disclosed as these are variable and subject to changes in product mix, and utilisation of manufacturing facilities, given the nature of operations. b) Inventories and sales Description Opening Stock Sales Closing Stock Quantity Value Quantity Value Quantity Value Kg. Rs Kg. Rs Kg. Rs 2006 Biochemicals Manufacturing: Enzymes 14,496 1,750 4,020,832 849,563 14,885 1,519 Pharmaceutical 5,016 1,620 6,485,449 5,847,249 15,232 26,491 Others - 18,992 - 170,414 - 40,215

Trading: Enzymes 2,993 366 26,980 7,698 3,763 595 Pharmaceutical 20 1 20 1 22,729 6,874,924 68,821

2005 Biochemicals Manufacturing: Enzymes 17,029 6,733 3,597,961 887,795 14,496 1,750 Pharmaceutical 1,245 10,454 4,108,771 5,518,550 5,016 1,620 Others - - - 48,956 - 18,992

Trading: Enzymes 2,028 192 29,595 8,187 2,993 366 Pharmaceutical 60 4 910 136 20 1 17,383 6,463,624 22,729 c) Purchase of traded goods: 2006 2005 Quantity Value Quantity Value (Kg) (Kg)

Biochemicals 27,750 7,927 31,430 8,494

Biocon Annual Report 2006 Financials 109 51 d) Details of consumption of raw materials, packing materials and stores: 2006 2005 Quantity Amount Quantity Amount (Kg) (Kg) Enzymes & Chemicals 26,419,330 3,899,704 15,429,610 3,363,846 Packing materials - 35,846 - 25,015 Others - 62,550 - 55,059 26,419,330 3,998,100 15,429,610 3,443,920

Consumption quantities and values have been derived on the basis of opening stock plus purchases less closing stock and therefore include adjustments ascertained during physical count, write off of obsolete items etc.

2006 2005 Value Percent Value Percent Imported 2,795,575 70 2,703,415 78 Indigenous 1,202,525 30 740,505 22 3,998,100 100 3,443,920 100

2006 2005 (iv) Value of imports calculated on C.I.F. basis : Raw materials 2,481,980 2,244,335 Packing materials 2,164 934 Capital goods 349,095 571,084 2,833,239 2,816,354

(v) Earnings in foreign currency: Export of goods on FOB basis 3,577,231 3,761,484 Research and development fees - 807 Recovery of freight, insurance etc on exports 1,504 652 Others 10,781 17,432 3,589,516 3,780,375

(vi) Dividend to non-resident shareholders : (remitted in foreign currency) Final Dividend Number of shareholders 19 769 Number of shares held 26,048,619 32,941,020 Dividend remitted (Rs in thousands) 52,097 32,941 Year to which it relates 2005 2004

(vii) Expenditure in foreign currency : ( on accrual basis) Sales commission 34,967 34,283 Interest on Foreign Currency Non-Resident loans 9,282 16,719 Travel and Conveyance 12,757 13,052 Patent fees 8,357 13,502 Legal and Corporate advisory services 12,609 - Others 37,128 55,349 115,100 132,905 (viii) Research & Development Expenses (other than on equipments and buildings) [Refer Note 17] Salaries, wages, bonus, etc 79,601 68,782 Employee stock compensation expense 1,545 2,683 Lab consumables 33,373 22,203 Travel and Conveyance 9,460 7,171 Patent and Informatic search fees 16,784 22,230 Others 44,415 19,091 185,178 142,160 Biocon Limited

25. Commitments 2006 2005

(a) Capital commitments Estimated amount of contracts remaining to be executed on capital account and not provided for, net of advances 336,041 982,897

(b) Operating lease commitments Where the Company is a lessee:

(i) Rent The Company had entered into an agreement for lease of building which expires in September 2015. Gross rental expenses for the year aggregates to Rs 90 (March 31, 2005 Rs Nil). The committed lease rentals in future are as follows :

Not later than one year 189 - Later than one year and not later than ﬁve years 965 - Later than ﬁve years 1,625 -

(ii) Vehicles The Company has taken vehicles for certain employees under operating leases, which expire in January 2010. Gross rental expenses for the period aggregate to Rs 4,356 (March 31, 2005 -- Rs 4,583). The committed lease rental in the future are:

Not later than one year 4,843 3,963 Later than one year and not later than ﬁve years 6,519 8,515

Where the Company is a Lessor: (i) Rent The Company has leased out certain parts of its building and land on an operating lease, which expire over a period upto 2011. Gross rental income for the year aggregate to Rs 1,885 (March 31, 2005 - Rs 2,624). There are no uncollectible minimum lease payments at the balance sheet date. Future minimum lease receipts under operating lease are as follows:

Not later than one year 2,650 2,628 Later than one year and not later than ﬁve years 12,028 10,032 Later than ﬁve years 8,578 7,714

26. Contingent liabilities

(a) Taxation matters under appeal 12,900 9,895

(b) Corporate guarantees (i) Corporate guarantee given in favour of the CED in respect of certain performance obligations of Syngene. The Company has informed that necessary terms and conditions have been complied with and no liabilities have arisen 217,500 217,500 (ii) Corporate guarantee given in favour of the CED in respect of certain performance obligations of biocon. 465,000 315,000

(c) Corporate guarantees given in favour of the CED in respect of certain performance obligations of BBPL. The Company has informed that the necessary terms and conditions have been complied with and no liability has arisen 131,352 46,239

(d) Corporate guarantees given in favour of the CED in respect of certain performance obligations of Clinigene. The Company has informed that the necessary terms and conditions have been complied with and no liability has arisen 4,976 -

(e) Claims against the Company not acknowledged as debts 2,170 2,170

(f) The Company has provided a letter of committment to fund the operations of its wholly owned subsidiary Clinigene. (See Note 9(iii))

Biocon Annual Report 2006 Financials 111 51 27. Details of utilisation of proceeds raised through public issue during the year 2006 2005 Capital work-in-progress [Note 1(a)] 3,150,000 1,325,643 Current investments -- Liquid money market mutual funds [Refer Note 9] - 1,824,357 3,150,000 3,150,000

28. Foreign exchange option contracts The Company has entered into option contracts to hedge highly probable forcasted forex transactions. As at March 31, 2006, the Company has currency option contracts to sell US$ 27 Million over the period beginning October 2006 to September 2007 in respect of the forcasted transactions. The impact of marked to market of these option contracts is Rs 24 Million (gain) as at March 31, 2006 which has not been recognised in the proﬁt and loss account in accordance with the Companys' accounting policy.

29. Segmental information

Business segments The primary reporting of the Company has been performed on the basis of business segment. The Company is organised into two business segments, enzymes and active pharmaceutical ingredients ('Pharma'). Segments have been identiﬁed and reported based on the nature of the products, the risks and returns, the organisation structure and the internal ﬁnancial reporting systems.

April 1, 2005 to March 31, 2006

Particulars Enzyme Pharma Unallocated Eliminations Total Revenues External sales, net 849,563 6,025,361 - - 6,874,924 Inter-segment transfers 72,294 - - (72,294) - Total revenues 921,857 6,025,361 - (72,294) 6,874,924 Costs Segment costs (523,481) (3,660,753) - - (4,184,234) Inter-segment transfers - (72,294) - 72,294 - Result Segment result 398,376 2,292,314 - - 2,690,690 Corporate expenses - - (893,484) - (893,484) Other income - - 41,125 - 41,125 Interest income - - 15,786 - 15,786 Operating proﬁt 1,854,117 Depreciation (26,911) (142,463) (59,122) - (228,496) Interest expense - - (16,887) - (16,887) Income taxes - Current and deferred - - (273,904) - (273,904)

Net proﬁt 1,334,830

Other information Segment assets 626,616 8,864,941 - 9,491,557 Unallocated corporate assets 2,087,043 - 2,087,043

Total assets 11,578,600

Segment liabilities 138,006 1,751,748 - 1,889,754 Unallocated corporate liabilities 1,658,411 - 1,658,411

Total liabilities 3,548,165

Capital expenditure 10,073 114,648 335,361 - 460,082 Biocon Limited

April 1, 2004 to March 31, 2005

Particulars Enzyme Pharma Unallocated Eliminations Total Revenues External sales 896,814 5,566,810 - 6,463,624 Inter-segment transfers 84,128 - - (84,128) - Total revenues 980,942 5,566,810 - (84,128) 6,463,624 Costs Segment costs (505,705) (3,407,711) (36,354) - (3,949,770) Inter-segment transfers - (84,128) - 84,128 - Result Segment result 475,237 2,074,971 (36,354) - 2,513,854 Corporate expenses - - (585,900) - (585,900) Other income - - 155,795 - 155,795 Interest income - - 2,192 - 2,192 Operating proﬁt 2,085,941 Depreciation (26,386) (105,274) (49,255) - (180,915) Interest expense - - (19,931) - (19,931) Income taxes - Current and deferred - - (141,215) - (141,215)

Net proﬁt 1,743,880

Other information Segment assets 636,117 6,519,171 - - 7,155,288 Unallocated corporate assets - - 3,069,189 - 3,069,189

Total assets 10,224,477

Segment liabilities 132,476 1,917,232 - - 2,049,708 Unallocated corporate liabilities - - 1,215,385 - 1,215,385

Total liabilities 3,265,093

Capital expenditure 18,917 568,327 202,483 - 789,727

Geographical segments Secondary segmental reporting is performed on the basis of the geographical location of customers. The operations of the Company comprise export sales and contract reaserch fees contributing to approximately 53 percent (March 31, 2005 -- 58 per cent). The management views the Indian market and export markets as distinct geographical segments. The following is the distribution of the Company's sale by geographical markets

Revenues, net 2006 2005 India 3,297,693 2,702,140 Exports on FOB basis 3,577,231 3,761,484 Total 6,874,924 6,463,624

The following is the carrying amount of segment assets and additions to ﬁxed assets by geographical area in which the assets are located:

Carrying amount of segment assets 2006 2005

India 10,166,188 9,376,550 Outside India 1,412,412 847,927 Total 11,578,600 10,224,477 Carrying amount of segment assets outside India represents receivables from export sales.

Segment revenue and result

Biocon Annual Report 2006 Financials 113 51 The expenses that are not directly attributable and that cannot be allocated to a business segment on a reasonable basis are shown as unallocated corporate expenses.

Inter-segment transfers Segment revenue, segment costs and results include transfers between business segments. Such transfers have been made at cost. The inter-segment transfers have been eliminated on consolidation of the segments.

Segment assets and liabilities Segment assets include all operating assets used by the business segment and consist principally of ﬁxed assets, investments and current assets Segment liabilities comprise of loan funds which can be identiﬁed directly against the respective segments and includes segment current liabilities and provisions. Assets and liabilities that have not been allocated between segments are shown as part of unallocated corporate assets and liabilities respectively.

30. Prior year comparatives The previous year's ﬁgures have been re-grouped, where necessary to conform to current year's classiﬁcation.

S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary Biocon Limited

Balance sheet abstract and Company's general business proﬁle (All amounts in Indian Rupees thousands, except share data)

(a) REGISTRATION DETAILS Registration No. 3417 State Code 08 Balance Sheet Date March 31, 2006

(b) CAPITAL RAISED DURING THE YEAR Public Issue - Right Issue Nil Bonus Issue Nil Private Placement Nil

(c) POSITION OF MOBILISATION AND DEPLOYMENT OF FUNDS Total Liabilities and shareholders funds 11,578,600 Total Assets 11,578,600

Sources of Funds Paid up Capital 500,000 Reserves 7,530,435 Secured Loans 677,549 Unsecured Loans 372,927 Deferred tax liability 279,738

Application of Funds Net Fixed Assets 2,278,123 Capital work in progress 4,564,301 Long term Investments 1,390,554 Net Current Assets 1,127,671

(d) PERFORMANCE OF THE COMPANY Turnover 6,931,835 Total expenditure 5,323,101 Proﬁt before tax 1,608,734 Proﬁt after tax 1,334,830 Earnings per share in Rupees 13.97 Dividend rate % 50

(e) GENERIC NAME OF PRINCIPAL PRODUCTS OF THE COMPANY Item Code No (ITC Code) 350790 Product Description Enzymes for Pharmaceutical use Item Code No.(ITC Code) 280000 & 290000 Product Description Organic & Inorganic Chemicals

Biocon Annual Report 2006 Financials 115 51 [THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK] Biocon Limited and Subsidiaries - Indian GAAP

Biocon Limited and Subsidiaries INDIAN GAAP

Auditors' Report

To The Board of Directors of Biocon Limited

1. We have audited the attached Consolidated Balance Sheet of BIOCON LIMITED, its subsidiaries, Syngene International Private Limited and Clinigene International Private Limited and its joint venture, Biocon Biopharmaceuticals Private Limited [together referred to as 'the Group' as described in Note 2 (a)] as at March 31, 2006, and also the Consolidated Profit and Loss Account and the Consolidated Cash Flow Statement for the year ended on that date annexed thereto. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

2. We conducted our audit in accordance with the auditing standards generally accepted in India. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatements. An audit includes, examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. We report that the consolidated ﬁnancial statements have been prepared by the Group in accordance with the requirements of Accounting Standards (AS) 21, Consolidated Financial Statements issued by the Institute of Chartered Accountants of India.

4. Without qualifying our opinion, we draw attention to Note 1(c) to the financial statements relating to the status and recoverability of the Company's investments in Nobex Inc., USA ('Nobex'). As more fully discussed in Note 1(c) to the financial statements, the Company had invested Rs 256 million in the common stock and promissory notes of Nobex from October 2004 through December 31, 2005. As on December 1, 2005, Nobex had filed for bankruptcy under Chapter 11 of US Bankruptcy laws. The audit report for the three month period and nine-month period ended December 31, 2005 was modified as there was a uncertainty with respect to the Company's ability to recover its investments in Nobex from the monetization of intellectual properties.

Pursuant to the Company emerging as the winning bidder for the assets of Nobex at a bid value of US $ 5 million the sale process for which is expected to be completed within April 2006, the Company is conﬁdent that it would be able to commercialise the intellectual properties acquired and generate value in excess of its aggregate investments.

5. In our opinion and to the best of our information and according to the explanations given to us, the consolidated ﬁnancial statements give a true and fair view in conformity with the accounting principles generally accepted in India:

(a) in the case of the consolidated balance sheet, of the state of affairs of the Group as at March 31, 2006;

(b) in the case of the consolidated proﬁt and loss account, of the proﬁt for the year ended on that date; and

For S.R. BATLIBOI & ASSOCIATES Chartered Accountants

per Prashant Singhal Partner Membership No: 93283

Bangalore April 20, 2006

Biocon Annual Report 2006 Financials 11751 BIOCON LIMITED CONSOLIDATED BALANCE SHEET AS AT MARCH 31, 2006 (All amounts in Indian Rupees thousands) Notes 2006 2005 SOURCES OF FUNDS (Note 30) Shareholders’ Funds Share capital 3 500,000 500,000 Reserves and surplus 2(a), 2(m) & 4 8,380,985 6,905,242 8,880,985 7,405,242

Minority Interest 5 32,218 8,786

Loan Funds Secured loans 6 677,549 493,279 Unsecured loans 7 372,927 270,136 1,050,476 763,415

Deferred Tax Liability 2(k) & 8 297,324 234,406

10,261,003 8,411,849 APPLICATION OF FUNDS Fixed Assets 2(b), 2(c), 2(e), 2(j), 2(i) Cost 9 & 18 4,070,462 3,300,033 Less: Accumulated depreciation 1,060,598 763,344 Net book value 3,009,864 2,536,689 Capital work-in-progress [including capital advances of Rs 66,778 (March 31, 2005 -- Rs 56,120)] 5,260,221 3,245,132 8,270,085 5,781,821

Investments 2(g) & 10 1,002,321 2,349,651

Current Assets, Loans And Advances Inventories 2(e) & 11 1,104,856 737,964 Sundry debtors 12 2,236,644 1,824,469 Cash and bank balances 13 20,236 34,238 Loans and advances 14 239,450 170,889 3,601,186 2,767,560

Less: Current Liabilities And Provisions 2(h), 2(i), 2(k), 2(g) & 15 2,612,589 2,487,183 Net Current Assets 988,597 280,377

10,261,003 8,411,849

The accompanying notes 1 to 30 form an integral part of this balance sheet.

As per our report of even date S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary Biocon Limited and Subsidiaries - Indian GAAP

BIOCON LIMITED CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR YEAR ENDED MARCH 31, 2006 (All amounts in Indian Rupees thousands, except share data including share price)

Notes 2006 2005 (Note 30) INCOME Gross sales 7,246,713 6,842,047 Less Excise Duty 371,789 378,423 Net sales 2(d) & 2(j) 6,874,924 6,463,624 Contract research fees 2(d) & 2(h) 1,005,756 662,040 Other income 16 51,446 156,247 7,932,126 7,281,911 EXPENDITURE Manufacturing, contract research and other expenses 2(d), 2(h), 2(h), 2(i), 2(j), 2(m), 2(o) & 17 5,592,557 4,887,081 Interest and ﬁnance charges 2(i) & 19 17,548 20,282 5,610,105 4,907,363

PROFIT BEFORE DEPRECIATION AND TAXES 2,322,021 2,374,548 Depreciation 2(b) & 9 298,138 225,051 Less: Amount transferred from revaluation reserve 2(b) & 4 1,606 1,606 296,532 223,445

PROFIT BEFORE TAXES 2,025,489 2,151,103 Provision for income-tax Current taxes 2(k) & 22 236,883 128,341 Deferred taxes 2(k) & 8 62,918 57,726 Fringe Beneﬁts 22 5,853 - PROFIT FOR THE YEAR 1,719,835 1,965,036 Minority interest 5 19,688 10,414 NET PROFIT FOR THE YEAR 1,739,523 1,975,450 Balance brought forward from previous year 2,812,928 1,239,916 PROFIT AVAILABLE FOR APPROPRIATION 4,552,451 3,215,366 Proposed dividend on equity shares 250,000 200,000 Tax on proposed dividend 35,063 28,050 Transfer to general reserve 133,483 174,388 BALANCE, END OF THE YEAR 4,133,905 2,812,928

Earnings per share (equity shares, par value of Rs 5 each) 2(n) & 21 Basic (in Rs) 18.20 20.88 Diluted (in Rs) 17.97 20.39 Weighted average number of shares used in computing earnings per share Basic 95,567,448 94,597,811 Diluted 96,791,300 96,861,668

The accompanying notes 1 to 30 form an integral part of the proﬁt and loss account.

As per our report of even date S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary

Biocon Annual Report 2006 Financials 11951 BIOCON LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2006 (All amounts in Indian Rupees Thousands) 2006 2005 (Note 30) I CASH FLOWS FROM OPERATING ACTIVITIES : Net proﬁt before tax 2,025,489 2,151,103 Adjustments for Add: Non cash item/items required to be disclosed separately: Depreciation 296,532 223,445 Unrealised exchange (gain)/loss (9,198) (2,802) Amortisation of employee compensation cost 9,467 23,396 Provision for bad and doubtful debts 2,578 1,249 Interest expense 25,475 27,290 Interest income (gross) (9,868) (9,551) Dividend earned (gross) (36,079) (120,800) Gain on sale of investment - (500) Gain on sale of investment in mutual funds (2,753) (1,796) Gain on assets sold (346) - Write back of provision - (13,185) 275,808 126,746 Changes in working capital and other provisions Inventories (366,892) 118,595 Sundry debtors (405,502) (639,621) Loans and advances (78,553) 65,315 Current liabilities and provisions (incl book overdraft) (413,528) 22,247 (1,264,475) (433,464) (988,667) (306,718) Cash generated from operations 1,036,822 1,844,385 Tax paid (net of refunds) (226,934) (120,097) Net cash provided by operating activities 809,888 1,724,288

II CASH FLOWS FROM INVESTING ACTIVITIES : Fixed assets Purchase (2,284,916) (2,850,390) Sale 500 - Change in minority Interest - (5,450) Interest received 10,039 8,983 Dividend received 36,079 120,800 Sale of investment 4,585,954 12,204,505 Purchase of investment Long term (336,130) (179,441) Current (2,899,739) (14,151,077) Net cash used for investing activities (888,213) (4,852,070)

III CASH FLOWS FROM FINANCING ACTIVITIES : Proceeds from employees for share purchase through ESOP Trust - 1,259 Short term borrowings from banks, net 183,500 20,384 Repayment of secured loans - (24) Deferred sales tax credit 102,791 95,479 Interest paid (25,640) (27,313) Dividend paid (199,275) (100,000) Dividend tax paid (28,050) (12,813) Movement in reserves of ESOP trust 13,423 5,450 Net cash used for ﬁnancing activities 46,749 (17,578)

IV NET CHANGE IN CASH AND CASH EQUIVALENTS ( I+II+III) (31,576) (3,145,360) V CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 34,238 3,175,140 VI CASH AND CASH EQUIVALENTS OF THE ESOP TRUST ACQUIRED DURING THE YEAR 17,574 4,458

VII CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR (IV + V + VI) 20,236 34,238

As per our report of even date S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary Biocon Limited and Subsidiaries - Indian GAAP

BIOCON LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2006 (All amounts in Indian Rupees and US Dollars in thousands, except share data including share price)

1. Background a. Incorporation and history Biocon Limited ('Biocon' or 'the Company'), promoted by Ms Kiran Mazumdar Shaw ('KMZ'), was incorporated at Bangalore in 1978 for manufacture of biotechnology products. Syngene International Private Limited ('Syngene') promoted by KMZ, was incorporated at Bangalore in 1993. At March 30, 2002, Biocon acquired 99.99 per cent of the equity shares of Syngene and, resultantly, the company became the subsidiary of Biocon. Clinigene International Private Limited ('Clinigene') was incorporated on August 4, 2000 at Bangalore and became a wholly owned subsidiary of Biocon on March 31, 2001.

Biocon entered into an Agreement on February 22, 2002 to set up a Joint Venture Company, with CIMAB SA ('CIMAB'), a company organised and existing under the laws of Cuba and engaged in research, development, manufacturing and marketing of Biopharmaceuticals, to manufacture and market products using technology and to carry out research activities. Accordingly, Biocon Biopharmaceuticals Private Limited ('BBPL') was incorporated on June 17, 2002 and, on April 18, 2003, Biocon acquired a 51 per cent shareholding in BBPL.

In March 2004, the Company completed an Initial Public Offering ('IPO') and made a fresh issue of 10,000,000 equity shares of Rs 5 each at a price of Rs 315 per share. Consequently, on April 7, 2004, the equity shares of the Company were listed on the National Stock Exchange of India and The Stock Exchange, Mumbai. The proceeds of the issue are being used, to the extent required, for setting up the new facilities to augment the existing capacities for the submerged fermentation and chemical synthesis operations (collectively referred to as 'the Project'), the Company has currently deployed the unutilised funds raised for the Project in liquid money market mutual fund investments [See Note 10 & 27].

Biocon, together with its subsidiaries, Syngene and Clinigene and the joint venture company, BBPL hereinafter is collectively referred to as 'the Group'. b. Operations Biocon is engaged in the manufacture of biotechnology products in the pharmaceutical and enzyme sectors through fermentation based technology and had also made an entry in the formulation business during the year ended March 31, 2005. Syngene is primarily engaged in providing contract research services to overseas customers in the ﬁeld of synthetic chemistry and molecular biology, it also sells products arising from research activities carried out on behalf of its customers; and Clinigene undertakes clinical research activities on discovering new biomarkers and is extending its activity to discovering new diseases subsets and novel data based on pharmacogenomics. The Group has its facilities located at Hebbagodi and Bommasandra, Bangalore district, Karnataka. c. Investments in Nobex Inc., USA The Company had entered into Research and Development Agreements and Investment Agreements with Nobex Inc., USA ('Nobex') [Refer Note 9(i)] to carry out joint research and development for Oral Insulin Product and BNP products on October 20, 2004 and April 25, 2005, respectively; and invested Rs 256 million in the common stock and promissory notes from October 2004 through December 31, 2005. It has further paid Rs 13 million towards licence fees for Oral Insulin and Rs 54 million towards loan and security arrangement entered on December 1, 2005 to facilitate the orderly sale of asset. The investments of Rs 339 million upto March 31, 2006 is reﬂected as investments (schedule 10).

As on December 1, 2005, Nobex had ﬁled for bankruptcy under Chapter 11 of US Bankruptcy laws. Consequently, the audit report for the three month period and nine-month period ended December 31, 2005 was modiﬁed as there was uncertainty with respect to the Company's ability to recover its investments in Nobex from the monetization of intellectual properties.

Biocon Annual Report 2006 Financials 12151 Subsequently on March 20, 2006, the Company has emerged as the winning bidder for the assets of Nobex; including, without limitation, patents relating to certain technologies for Oral Insulin, Oral BNP and Basil Insulin, for a total consideration of US$ 5 million. The Closing for the sale process is expected to be completed within April 2006, accordingly, the total commitment made by Biocon including investments already made aggregates to US$ 12 million. Also, the Company has incurred Rs 21 million of legal costs directly related to the acquisition of these patents upto March 31, 2006, and included under capital work in progress.

Based on the joint product development programs carried on for the Oral Insulin and BNP since October 20, 2004 and April 25, 2005, respectively, the Company is conﬁdent that it would be able to commercialise the intellectual properties acquired from Nobex by the year 2012 and based on an expert independent opinion, believes the value of such monetized intellectual property over its economic life to be in excess of the total investments made by it/to be made in Nobex. The ultimate realisability of this investments cannot be presently determined and accordingly, these ﬁnancial statements do not include any adjustments.

2. Statement of significant accounting policies a. Basis of presentation and consolidation The financial statements are prepared under the historical cost convention, on the accrual basis of accounting and to comply in all material respects with the generally accepted accounting principles in India including the mandatory accounting standards issued by the Institute of Chartered Accountants of India ('ICAI') to reflect the financial position and the results of operations of Biocon together with its subsidiary companies, Syngene and Clinigene and joint venture company, BBPL.

Further, the financial statements are presented in the general format specified in Schedule VI to the Companies Act, 1956 ('the Act'). However, as these financial statements are not statutory financial statements, full compliance with the above Act is not required and so they do not reflect all the disclosure requirements of the Act.

The consolidated financial statements of the Group have been prepared based on a line-by-line consolidation of the balance sheet, statement of profit and loss and cash flows of Biocon, Syngene, Clinigene and BBPL as at March 31, 2006.

In accordance with the revised Accounting Standard 27, 'Financial Reporting of Interests in Joint Ventures', ('AS 27'), BBPL, a joint venture company has been accounted as a subsidiary effective April 1, 2004, and computed minority interest. Upto the year ended March 31, 2004, BBPL was accounted as per the proportionate consolidation method as per the prevailing AS 27, at that time.

All material inter-company transactions and balances between the entities included in the consolidated ﬁnancial statements have been eliminated.

In accordance with the Employee Stock Option Scheme and Stock Purchase Guidelines, 1999 ('SEBI guidelines') issued by Securities and Exchange Board of India ('SEBI'), the Company has also consolidated the ESOP Trust [See Note 20].

The signiﬁcant accounting policies adopted by the Group in respect of the consolidated ﬁnancial statements are detailed as follows: b. Fixed assets and depreciation

Fixed assets are stated at cost, except for revalued freehold land and buildings, which are shown at, estimated replacement cost as determined by valuers less impairment loss, if any, and accumulated depreciation. The Group capitalises all costs relating to the acquisition and installation of ﬁxed assets.

Per cent Buildings 4.00 Plant and machinery 9.09 - 33.33 Research and development equipment 11.11 Furniture and ﬁxtures 16.67 Vehicles 16.67

Leasehold land on a lease-cum-sale basis are capitalised at the allotment rates currently charged by the Municipal Authorities. Leasehold improvements are being depreciated over the lease term or useful life whichever is lower.

The depreciation charge over-and-above the depreciation calculation on the original cost of the revalued assets is transferred from the revaluation reserve to the consolidated proﬁt and loss account.

Assets individually costing less than Rs 5 are fully depreciated in the year of purchase. Biocon Limited and Subsidiaries - Indian GAAP

c. Impairment of long-lived assets Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the income statement for items of ﬁxed assets carried at cost. The recoverable amount is the higher of an asset's net selling price and value in use. The net selling price is the amount obtained from the sale of an asset in an arm's length transaction while value in use is the present value of estimated future cash ﬂows expected to arise from the continuing use of an asset, from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or, if not possible, for the cash generating unit. Impairment loss recognised for an asset in earlier accounting periods is reversed, to the extent of its recoverable amount, if there has been a change in the estimates of used to determine the asset's recoverable amount since the last impairment loss was recognised. d. Intangibles Goodwill Goodwill is amortised over a period of 5 years and assessed for impairment at each balance sheet date.

Contract research agreements The Group enters into two basic types of contract research agreements and the revenues therefrom are recognised on the following basis: i. Time and material management Revenues are recognised as services are rendered, in accordance with contractual agreements. ii. Fixed price arrangements Revenues relating to fixed price contracts are recognised based on the percentage of completion method. g. Investments Investments that are readily realisable and intended to be held for not more than 12 months are classified as current investments. All other investments are classified as long-term investments. Long term investments are stated at cost. However, provision for diminution in value is made to recognise a decline other than temporary in the value of the investments. Current investments are carried at lower of cost and fair value and determined on an individual investment basis.

Biocon Annual Report 2006 Financials 12351 h. Retirement benefits The Group has schemes of retirement benefits for provident fund, gratuity and superannuation, in respect of which, the Group's contributions are charged to the consolidated profit and loss account. The contributions towards provident fund are made to statutory authorities. The gratuity and superannuation fund benefits of the Group are administered by a trust formed for this purpose through the group gratuity and superannuation scheme with Birla Sun Life Insurance Company Limited ('Birla Sunlife'). In respect of gratuity, the liability is accrued on an independent actuarial valuation at the year end. In respect of superannuation, the Group has accrued the liability, based on the schemes of the Group. The Company has discontinued the superannuation scheme during the year with effect from April 1, 2005. i. Leave encashment Liability for leave encashment is in accordance with the rules of the Group and is provided on the basis of an actuarial valuation performed by an independent actuary at the year end. j. Foreign currency transactions Initial Recognition Foreign currency transactions are recorded in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.

Exchange Differences Exchange differences arising on the settlement of monetary items or on the Group's monetary items at rates different from those at which they were initially recorded during the year, or reported in previous ﬁnancial statements, are recognised as income or as expenses in the year in which they arise except those arising from investments in non-integral operations.

Exchange differences arising on a monetary item that, in substance, form part of the Group's net investment in a non-integral foreign operation is accumulated in a foreign currency translation reserve in the ﬁnancial statements until the disposal of the net investment, at which time they are recognised as income or as expenses.

Exchange differences relating to the acquisition of ﬁxed assets are adjusted to the cost of ﬁxed assets.

Forward Exchange Contracts not intended for trading or speculation purposes

The premium or discount arising at the inception of forward exchange contracts is amortised as expense or income over the life of the contract. Exchange differences on such contracts are recognised in the statement of proﬁt and loss in the year in which the exchange rates change. Any proﬁt or loss arising on cancellation or renewal of forward exchange contract is recognised as income or as expense for the year.

Foreign Currency Options Contracts not intended for trading or speculation purposes

The Company enters into foreign currency option contracts to hedge its risks with respect to realisation of future receivables. The cost of these contracts, if any, are expensed over the period of the contract. The Company recognises the loss/gain on the Expiry or Cancellation, whichever is earlier, of the Options Contracts. k. Income tax Tax expense comprises current, deferred and fringe benefit tax. Current income tax and fringe benefit tax is measured at the amount expected to be paid to the tax authorities in accordance with the Indian Income Tax Act. Deferred income taxes reflects the impact of current year timing differences between taxable income and accounting income for the year and reversal of timing differences of earlier years. Deferred tax is measured based on the tax rates and the tax laws enacted or substantively enacted at the balance sheet date. Deferred tax assets are recognised only to the extent that there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. Deferred tax assets are recognised on carry forward of unabsorbed depreciation and tax losses only if there is virtual certainty that such deferred tax assets can be realised against future taxable profits. Unrecognised deferred tax assets of earlier years are re-assessed and recognised to the extent that it has become reasonably certain that future taxable income will be available against which such deferred tax assets can be realised. Biocon Limited and Subsidiaries - Indian GAAP

l. Borrowing costs Borrowing costs that are attributable to the acquisition and construction of a qualifying asset are capitalised as a part of the cost of the asset. Other borrowing costs are recognised as an expense in the year in which they are incurred. m. Deferred employee stock compensation costs Deferred employee stock compensation costs for stock options are recognised on the basis of generally accepted accounting principles and in accordance with the guidelines of Securities and Exchange Board of India, and, are measured as the excess of the fair value of the Company's stock on the stock options grant date over the amount an employee must pay to acquire the stock and recognised in a graded manner on the basis of weighted period of services over the vesting period of equity shares. The fair value of the options is measured on the basis of an independent valuation performed or the market price in respect of stock options granted. n. Earnings per share The earnings considered in ascertaining the Group's earnings per share comprise of the net proﬁt after tax for the year. The number of shares used in computing the basic earnings per share is the weighted average number of shares outstanding during the year and are adjusted for bonus shares and sub-division of shares for all periods presented in these consolidated ﬁnancial statements. The number of shares used in computing diluted earnings per share comprises the weighted average share considered for deriving basic earnings per share, and also the weighted average number of shares, if any which would have been issued on the conversion of all dilutive potential equity shares.

The shares issued to the ESOP Trust have been considered as outstanding for basic earnings per share purposes, to the extent these shares have been allocated to the employees’ pursuant to the ESOP scheme and are eligible for exercise. For dilutive EPS purpose, the shares, which are not yet eligible for exercise, have been considered as dilutive potential equity shares. o. Operating lease Leases of assets under which all the risks and rewards of ownership are effectively retained by the lessor are classiﬁed as operating leases. Lease payments under operating leases are recognised as an expense on a straight-line basis over the lease term. p. Segment reporting Identiﬁcation of segments The Group’s operating businesses are organized and managed separately according to the nature of products manufactured/traded, with each segment representing a strategic business unit that offers different products to different markets. The analysis of geographical segments is based on the areas in which the Group's products are sold.

Intersegment Transfers The Group generally accounts for intersegment sales and transfers at an agreed marked-up price.

Allocation of common costs Common allocable costs are allocated to each segment according to the relative contribution of each segment to the total common costs.

Unallocated items The Corporate and other segment includes general corporate income and expense items which are not allocated to any business segment. q. Provisions A provision is recognised for a present obligation as a result of past event; it is probable that an outﬂow of resources will be required to settle the obligation and in respect of which a reliable estimate can be made. Provisions are not discounted to its present value and are determined based on best management estimate required to settle the obligation at the balance sheet date. These are reviewed at each balance sheet date and adjusted to reﬂect the current best estimates.

Biocon Annual Report 2006 Financials 12551 3. Share capital 2006 2005

Authorised: 120,000,000 (March 31, 2005 -- 120,000,000) equity shares of Rs 5 each (March 31, 2005 -- Rs 5 each) 600,000 600,000 Issued, subscribed and paid-up: 100,000,000 (March 31, 2005 -- 100,000,000) equity shares of Rs 5 each (March 31, 2005 -- Rs 5 each), fully paid 500,000 500,000

(a) Of the above equity shares: (i) 30,800 equity shares of Rs 100 each were allotted as fully paid bonus shares by capitalisation of general reserve in the year ended March 31, 1997. (ii) 23,471 equity shares of Rs 100 each were allotted as fully paid-up shares in the year ended March 31, 2000 pursuant to a contract for consideration other than cash. (iii) On October 8, 2001, Biocon issued 12,153 equity shares of Rs 100 each to the ESOP Trust under an Employee Stock Option Plan ('ESOP Plan') and the ESOP Trust acquired 350 equity shares of Rs 100 each from certain individuals. (iv) On March 30, 2002, Biocon acquired 99.9 per cent equity in Syngene through the issue of 202,780 equity shares of Rs 10 each. The consideration was determined on the basis of a fair valuation, as approved by the statutory authorities in India. The related share premium at Rs 403.8 per equity share has been credited to share premium account. (v) On May 9, 2002 Biocon has further issued 15,870 equity shares of Rs 10 each to the Trust under the ESOP Plan. The Trust on October 20, 2003 acquired 2,500 equity shares of Rs 10 each from certain individuals. The total shares issued to the Trust were 7,023,100 equity shares of Rs 5 each of which grants have been made for 3,822,039 equity shares of the Company under the ESOP Plan as at March 31, 2006. (vi) In March 2004, Biocon made an IPO of 10,000,000 fresh equity shares of Rs 5 each at a price of Rs 315 per share.

(b) The shareholders at the Extraordinary General Meeting ('EGM') of Biocon held on February 25, 2002, approved the sub-division of equity shares of face value of Rs 100 each into ten equity shares of face value of Rs 10 each. The Board of Directors in their meeting held on March 30, 2002 passed a resolution for effecting the sub-division. Subsequent to this sub-division, the authorised equity share capital of Rs 20,000 has been divided into 2,000,000 equity shares of Rs 10 each and the then issued, subscribed and paid-up capital of Rs 18,218 as at March 31, 2002 was divided into 1,821,780 equity shares of Rs 10 each.

(c) The shareholders at the EGM of Biocon held on November 11, 2003, approved the sub-division of equity shares of face value of Rs 10 each into 2 equity shares of Rs 5 each and increase in authorised capital from Rs 20,000 to Rs 600,000. Subsequent to this sub- division, the authorised equity share capital of Rs 20,000 has been divided into 4,000,000 equity shares of Rs 5 each and the issued, subscribed and paid -up capital of Rs 18,377 has been divided into 3,675,300 shares of Rs 5 each.

(d) Further, the shareholders at the EGM of Biocon held on November 11, 2003 approved the allotment of 86,324,700 equity shares of Rs 5 each as bonus shares in the ratio of 1 : 23.4877958 to the shareholders existing as on November 11, 2003, which was the approved record date for this purpose, by capitalisation of the balance in the profit and loss account of Rs 431,624.

[THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK] Biocon Limited and Subsidiaries - Indian GAAP

4. Reserves and surplus 2006 2005 Capital Reserve 17,094 17,094

Revaluation Reserve Balance, beginning of the year 14,302 15,908 Less: Transfer to proﬁt and loss account 1,606 1,606 12,696 14,302 Securities Premium Balance, beginning / end of the year 3,288,478 3,288,478 3,288,478 3,288,478

General Reserve Balance, beginning / end of the year 689,796 515,408 Add: Transfer from Proﬁt and Loss Account 133,483 174,388 823,279 689,796

ESOP trust Dividend and interest income, net 18,873 5,450

Stock compensation adjustment (See note 2(l) & 20) Stock options outstanding 94,129 94,788 Deletions during the year (2,339) (659) 91,790 94,129 Less: Deferred employee stock compensation expense (5,130) (16,935) 86,660 77,194

Balance in proﬁt and loss account 4,133,905 2,812,928

8,380,985 6,905,242

(i) Biocon acquired 99.99 per cent in Syngene on March 30, 2002, through the issue of 202,780 equity shares of Rs 10 each. Biocon's shares were fair valued at Rs 907 at the transaction date. Further, as of March 30, 2002 the net assets of Syngene were Rs 101,422 resulting in capital reserve of Rs 17,094.

(ii) Share premium includes an amount of Rs 81,881 received on the allotment of 202,780 equity shares of Rs 10 each on March 30, 2002 at a premium of Rs 403.8 per equity share [(See Note 3(a) (iv)] and Rs 3,100,000 received on the allotment of 10,000,000 equity shares pursuant to the Company's IPO in March 2004 [See Note 3(a) (vi)]. (iii) Deferred employee stock compensation expense (See Note 20): 2006 2005

Stock compensation expense outstanding 16,935 40,990 Stock options cancelled/forfeited during the year (2,339) (659) Stock compensation expense amortised during the year (9,467) (23,396) Closing balance of deferred employee stock compensation expense 5,130 16,935

(iv) Biocon on November 11, 2003 issued 86,324,700 bonus shares of Rs 5 each through capitalisation of the balance in the proﬁt and loss account to the extent of Rs 431,624. [See note 3(d)]

5. Minority interest

Minority interest represents that part of the net results of operations and of the net assets of Syngene to the extent of 170 shares (0.01 per cent) and BBPL to the extent of 4,312,000 shares (49 per cent) of the share capital, which are attributable to interests which are not owned, directly or indirectly by Biocon.

The share of the net results of operations attributabe to the minority shareholders is as follows: 2006 2005

As per last balance sheet 8,786 21 Opening minority share of BBPL, arising on account of revision in AS-27 [See Note 2(a)]. - 1,933 Additional capital issued during the year 43,120 17,246 Proﬁt/(loss) for the year (19,688) (10,414) 32,218 8,786

Biocon Annual Report 2006 Financials 12751 6. Secured loans 2006 2005

From banks Cash credit, packing credit, etc. 677,549 493,279 677,549 493,279

(a) Cash credit, packing credit, etc (i) On May 10, 2004, the Company renewed its total rupee and foreign currency denominated fund based working capital facilities with State Bank of India ('SBI') of Rs 200,000. These facilities are repayable on demand, secured by a pari-passu ﬁrst charge on current assets and carry an interest rate of 2 to 6 per cent per annum for foreign currency denominated loans and 7 to 13 per cent per annum for rupee loans. The Company has utilised Rs 130,007 (March 31, 2005 -- Rs 41,567) as of March 31, 2006 inclusive of foreign currency loans of Rs 128,856 (US$ 2,897) (March 31, 2005 -- Rs 41,245) (US$946) as of March 31, 2006.

7. Unsecured loans 2006 2005

Deferred payment liability 371,517 270,136 NMITLI - CSIR Loan 1,410 - 372,927 270,136

(i) Under the Industrial Policy of the Government of Karnataka, the Company on November 18, 2000 obtained an order from Karnataka Sales Tax Authority for allowing deferment of sales tax (including turnover tax) for a period upto 8 years with respect to sales from its Bommasandra manufacturing facility of the Company. Under the Order, the deferment amount should not exceed Rs 24,375, of which at March 31, 2006, the Company had utilised Rs 1,050 (March 31, 2005 -- Rs 929).

(ii) Under the Agro Food Processing Industrial Policy of the Government of Karnataka, the Company on November 18, 2000 obtained an order from Karnataka Sales Tax Authority for allowing deferment of sales tax (including turnover tax) for a period upto 12 years with respect to sales from Hebbagodi manufacturing facility of the Company. Under the order, the deferment amount should not exceed Rs 648,938 of which at March 31, 2006, the Company had utilised Rs 370,467 (March 31, 2005 -- Rs 269,207 ).

(iii) On March 31, 2005, the Company has entered into an agreement with the Council of Sceintiﬁc and Industrial Research ('CSIR'), for an unsecured loan of Rs 4,030 for carrying out part of the research and development project under the New Millenium Indian Technology Leadership Initiative ('NMITLI') Scheme. The ﬁrst instalment of Rs 1,410 (March 31, 2005 - Rs Nil) was released on signing the agreement. The second and third instalment of Rs 1,410 and Rs 1,210 will be released after one year and two years respectively from the date of the agreement. The loans are repayable over 10 annual equal installments starting from October 1, 2008 and carry an interest rate of 3 percent per annum. Biocon Limited and Subsidiaries - Indian GAAP

8. Deferred tax liability Deferred tax (asset) / Deferred tax (asset) liability as at Current year / liability as at April 1, 2005 charge / (credit) March 31, 2006

Depreciation 255,600 69,838 325,438 Employee retirement beneﬁts (15,446) (6,051) (21,497) Disallowance under section 43B 1 - 1 Provision for doubtful debts (5,642) (868) (6,510) Others (107) (1) (108) 234,406 62,918 297,324

Year ended March 31, 2005 176,680 57,726 234,406

(i) The Company, effective August 26, 2003 received approval from the Cochin Special Economic Zone for the setting up of a 100 percent Export Oriented Unit ('EOU') for the manufacture and export of all types of statins on which, the Company claims deduction under section 10B of the Income-tax Act, 1961 ('IT Act').

In accordance with the provisions of section 10B of the IT Act, effective August 26, 2003 the Company can avail of a tax deduction in respect of 100 per cent of all export income derived from the export sales arising out of its EOUs. Accordingly, the Company, has not recognised any additional deferred tax liabilty for the EOUs as it expects the timing differences originating in this period to reverse out during the tax holiday period.

(ii) Syngene, constituting two 100 per cent Export Oriented Units (approved by the Cochin Export Processing Zone on December 14, 1998 and the Cochin Special Economic Zone on August 24, 2001), claims exemption under section 10B of the IT Act. Syngene has recognised the deferred tax liability/(asset) arising on account of timing differences for one unit which no longer claims exemption under section 10B of the IT Act, and with respect to Unit II, for those timing differences which do not reverse during the tax holiday.

(iii) During the year, Clinigene has incurred book losses of Rs 11,109 (March 31, 2005 - Rs 29,453) resulting in a tax loss carry-forward situation (accumulated losses at March 31, 2006 - Rs 62,758). Based on the above, the Company has not recognized the net deferred tax asset resulting from the tax loss carry forward as at March, 2006, as currently, although the management is conﬁdent of achieving proﬁtablility, there is no virtual certainty that it would reverse the tax loss carry forwards.

(iv) As BBPL is in the start up stage and has not yet commenced operations, it is not eligible to carryforward any tax losses under the Indian Income Tax Act, 1961. The current tax provision of Rs 67 is towards fringe beneﬁt tax as, introduced under the Finance Act, 2005

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Biocon Annual Report 2006 Financials 12951 9. Fixed assets Balance at the beginning Additions during Deletions during Balance at the end of the year the year the year of the year Cost/Valuation Goodwill 1,143 - - 1,143 Land Freehold (revalued) 8,967 - - 8,967 Freehold (others) 52,089 42,242 - 94,331 Leasehold 169,950 - - 169,950 Buildings (revalued) 16,561 - - 16,561 Buildings (others) 520,732 109,243 - 629,975 Leasehold improvements 1,962 3,191 - 5,153 Plant and machinery 2,151,369 406,982 - 2,558,351 Research and development equipment 311,229 197,241 - 508,470 Furniture and ﬁxtures 54,570 10,074 - 64,644 Vehicles 11,461 2,494 1,038 12,917 3,300,033 771,467 1,038 4,070,462 Year ended March 31, 2005 2,145,665 1,154,368 - 3,300,033

Accumulated depreciation Goodwill 1,143 - - 1,143 Land Freehold (revalued) - - - - Freehold (others) - - - - Leasehold - - - - Buildings (revalued) 11,226 2,409 - 13,635 Buildings (others) 67,435 20,465 - 87,900 Leasehold improvements 468 552 - 1,020 Plant and machinery 578,663 227,874 - 806,537 Research and development equipment 77,976 35,453 - 113,429 Furniture and ﬁxtures 21,387 9,223 - 30,610 Vehicles 5,046 2,162 884 6,324 763,344 298,138 884 1,060,598 Year ended March 31, 2005 538,293 225,051 - 763,344

Net book value Goodwill - - Land Freehold (revalued) 8,967 8,967 Freehold (others) 52,089 94,331 Leasehold 169,950 169,950 Buildings (revalued) 5,335 2,926 Buildings (others) 453,297 542,075 Leasehold improvements 1,494 4,133 Plant and machinery 1,572,706 1,751,814 Research and development equipment 233,253 395,041 Furniture and ﬁxtures 33,183 34,034 Vehicles 6,415 6,593 2,536,689 3,009,864 Year ended March 31, 2005 1,607,372 2,536,689

(a) Biocon acquired 100 per cent shareholding in Clinigene on March 31, 2001, at a consideration of Rs 500. As of March 31, 2001, the net assets of Clinigene were Rs 188 resulting in a goodwill of Rs 312. The goodwill was fully amortised during the year ended March 31, 2001. (b) Biocon acquired 51 per cent shareholding in BBPL on April 18, 2003, at a consideration of Rs 102. As of April 18, 2003, Biocon's share of the negative networth of BBPL was Rs 729 resulting in a goodwill of Rs 831. The goodwill was fully amortised during the year ended March 31, 2004. (c) Certain freehold land and buildings were revalued on November 1, 1994, based on the estimated replacement cost after considering depreciation upto that date, as per valuers reports and the resultant surplus of Rs 34,529 was credited to revaluation reserve. Of this reserve, Rs 21,833 (March 31, 2005 -- Rs 20,227) has been transferred to the profit and loss account for depreciation on these assets or adjusted on the sale of these assets. (d) The Company has capitalised net foreign exchange loss of Rs 797 (March 31, 2005 - Rs Nil) during the year against capital work in progress / fixed assets (e) On December 5, 2002, Karnataka Industrial Areas Development Board ('KIADB') allotted land aggregating 26.75 acres to the Company for Rs 64,200 on a lease-cum sale basis for a period of 6 years. In addition, during the year ended March 31, 2005, the Company acquired an additional 41.25 acres of land for Rs 99,417 from KIADB. One of the key conditions include commencement of commercial operations by the Company within 24 months of taking possession, which the Company believes has been complied with by the commencement of operations by Syngene on this land on October 21, 2004. During the quarter ended June 30, 2005, the Company has paid an advance of Rs 56,320 towards allotment of additional 22 acres of land, offered to the Company by KIADB on December 20, 2003. The Company has received the possession certificate from KIADB in January 2006 and is in the process of getting the land registered. (f) The Company has taken a house property on lease for a term of 10 years at a monthly rental of Rs 15 from P K Associates. The Company has incurred an amount of Rs 3,191 on the lease improvements on this house property (Refer Note 23) Biocon Limited and Subsidiaries - Indian GAAP

10. Investments (At cost) 2006 2005 Long term investments A) Non trade: National Savings Certiﬁcates 13 13 13 13 B) Trade investment:

In Other Companies: Unquoted and fully paid up 3% Convertible Promissory Note of US$ 5,150,000 (March 31, 2005 - US$ 1,000,000) in Nobex Corporation, USA [ Refer Note 1(c) and (i) below ] 226,274 43,966 3% Series B Convertible Promissory Note of US$ 3,000,000 (March 31, 2005 - US$ 1,000,000) in Vaccinex Inc., USA 131,930 44,735 2,000,000 (March 31, 2005 - 2,000,000) Common Stock at US$ 0.50 each, fully paid, 45,640 45,640 par value US$ 0.001 each of Nobex Corporation, USA [ Refer Note 1(c) and (i) below ] 645,161 (March 31, 2005 - 645,161) Series B1 Preferred Stock at US$ 1.55 each, fully paid, 45,100 45,100 par value US $0.01 each of Vaccinex Inc., USA

Advance to Nobex [ Refer Note 1(c) and (i) below] 66,627 -

515,571 179,441

(b) The Company has entered into an ‘Investment Agreement’ with Nobex Corporation, USA ('Nobex') on October 20, 2004 to invest an amount of US$ 3.3 million (US$ 1 million in Common Stock and US$ 2.3 million in Convertible Promissory Notes). Further, the Company has entered into a ‘Oral Insulin Joint Product Development Agreement’ for development and commercialization of the Oral Insulin Product. In addition, Biocon will get the warrants of US$ 4.4 million convertible into US$ 3.3 million worth of common stock. As on March 31, 2006, the Company has invested Rs 45,640 (US$ 1 million ) (March 31, 2005 - US$ 1 million) towards purchase of common stock, an amount of Rs 87,698 (US$ 2 millon) ( March 31, 2005 - US$ 1.0 million) towards the convertible promissory note and has received the warrants entitling it to subscribe for 1.33 million common stock at an exercise price of US$ 0.75 each.

(c) The Company has also entered into an 'Investment Agreement' with Nobex Corporation, USA on April 25, 2005 to invest an amount of US$ 3.15 million in Convertible Promissory Notes. Further, the Company has entered into an 'BNP Joint Product Development Agreement' for development and commercialization of the Oral BNP Product. As on March 31, 2006 the Company has invested Rs 138,576 (US$ 3.15 million) towards purchase of the convertible promissory notes. Further, the Company has paid Rs 12 million towards license fee for distribution rights of Oral Insulin on its commercialization ; and consequent to the ﬁling of the bankruptcy charge under Chapter 11 of the US Bankruptcy laws, the Company has agreed to be a debtor in possession to facilitate the orderly sale of assets of Nobex and committed to fund Nobex for a total sum of USD 1.4 Million under the Loan and Security Agreement ('the agreement') dated December 1, 2005. This amount shall be fully recovered on ﬁrst priority basis against the sale of assets of Nobex. As on March 31, 2006, the Company has funded a sum of Rs 54 million (Refer Schedule 13).

(ii) The Company has entered into a ‘Securities Purchase Agreement’ with Vaccinex Inc., USA ('Vaccinex') on November 3, 2004 to invest an amount of US$ 4 million (US$ 1 million in Series B1 Convertible Preferred Stock and US$ 3 million in Series B Convertible Promissory Notes). Further, the Company has entered into a ‘Research and Collaboration Agreement’ to discover, develop, and commercialize human therapeutic monoclonal antibodies. As on March 31, 2006 the Company has invested Rs 45,100 (US$ 1 million) in the convertible preferred stock and an amount of Rs 131,930 (US$ 3 million) in the convertible promissory note.

Vaccinex has incurred a loss of US$ 5.5 million for the year ended December 31, 2005. In addition, the networth of Vaccinex is fully eroded at the balance sheet date. Vaccinex is in the process of negotiating various relationships, including strategic investors to fund its development plans. As Vaccinex is a development stage enterprise and of strategic importance to the Company, it believes that there is no permanent dimunition in the value of this investment. In accordance with Accounting Standard - 9, considering the above, the Company has not recognised interest income accrued on the promissory notes.

Biocon Annual Report 2006 Financials 13151 Other Investments 2006 2005

C) Current and unquoted (at lower of cost and fair market value) 1,788,569 units (March 31, 2005 -- 1,712,547) of Rs 10 each in Reliance Mutual Fund 27,313 26,150 [Market Value Rs 27,359 (March 31, 2005 -- Rs 26,186)] 10,000,000 units (March 31, 2005 -- 2,935,137) of Rs 10 each in ING Vysya Mutual Fund - FMP 100,000 - [Market Value Rs 100,000 (March 31, 2005 -- Rs Nil)] 10,000,000 units (March 31, 2005 -- 2,935,137) of Rs 10 each in LIC Mutual Fund 100,000 31,553 [Market Value Rs 100,046 (March 31, 2005 -- Rs 31,896)] 7,968,048 units (March 31, 2005 -- Nil) of Rs 10 each in Deutsche Mutual Fund 80,000 - [Market Value Rs 80,000 (March 31, 2005 -- Rs Nil)] 500,000 units (March 31, 2005 -- Nil) of Rs 10 each in Kotak Mutual Fund - FMP 50,000 - [Market Value Rs 50,000 (March 31, 2005 -- Rs Nil)] 2,739,621 units (March 31, 2005 -- 13,550,920) of Rs 10 each in HSBC Mutual Fund 27,412 137,856 [Market Value Rs 27,413 (March 31, 2005-- Rs 137,856)] Nil units (March 31, 2005 -- 2,101,906) of Rs 10 each in Birla Sunlife Mutual Fund - 21,019 [Market Value Rs Nil (March 31, 2005 -- Rs 21,023)] 40,510 units (March 31, 2005 -- Nil) of Rs 10 each in ING Vysya Liquid Fund 406 - [Market Value Rs 407 (March 31, 2005 -- Rs Nil)] 599,869 units (March 31, 2005 -- 1,515,461) of Rs 10 each in Grindlays Liquid Plan 6,178 15,608 [Market Value Rs 6,178 (March 31, 2005 -- Rs 15,623)] 2,337,273 units (March 31, 2005 -- 7,247,078) of Rs 10 each in JM Mutual Fund - Liquid Plan 23,414 72,629 [Market Value Rs 23,414 (March 31, 2005 -- Rs 72,637)] 2,137,074 units (March 31, 2005 -- Nil) of Rs 10 each in Deutsche Insta Cash Plus Fund 22,014 - [Market Value Rs 22,014 (March 31, 2005 -- Rs Nil)] 500,000 units (March 31, 2005 -- Nil) of Rs 10 each in HDFC Mutual fund - FMP 50,000 - [Market Value Rs 50,000 (March 31, 2005 -- Rs Nil)] Nil units (March 31, 2005 -- 4,085,713) of Rs 10 each in CanLiquid Fund - 41,025 [Market Value Rs Nil (March 31, 2005 -- Rs 41,025)]

Aggregate amount of unquoted investments 486,737 345,840

The following investments were purchased and sold during the year

Purchase and Sale of Nil units (March 31, 2005--1,874,055 of Rs 10 each in ING Vysya Liquid Fund - 20,190 Purchase and Sale of Nil units (March 31, 2005--3,022,418) of Rs 10 each in DSP Merrill Lynch Fund - 30,254 Purchase and Sale of 120,557 units (March 31, 2005--3,730,184) of Rs 10 each in LIC Liquid Fund 1,925 40,245 Purchase and Sale of Nil units (March 31, 2005--3,019,010) of Rs 10 each in Principal Asset Management Fund - 30,201 Purchase and Sale of Nil units (March 31, 2005--30,912) of Rs 1,000 each in Franklin Templeton Fund - 40,246 Purchase and Sale of Nil units (March 31, 2005--955,771) of Rs 10 each in HDFC Management Fund - 10,166 Purchase and Sale of Nil units (March 31,2005--3,017,595) of Rs 10 each in IL&FS Liquid Fund - 30,176 Purchase and Sale of 117,456,098 units (March 31, 2005 - 145,491,364) units of Rs 10 each in HSBC Cash Fund 1,184,089 1,494,070 Purchase and sale of 26,676 units (March 31, 2005--1,401,338) of Rs 1,000 each in TATA Mutual Fund 30,447 15,673 Purchase and sale of Nil units(March 31, 2005--4,567,477) of Rs 10 each in JM Mutual Fund - FMP - 45,920 Purchase and sale of 7,117,532 units (March 31, 2005--72,800) of Rs 10 each in Reliance Fixed Term Scheme 71,175 728 Purchase and sale of 6,900,075 units(March 31 2005-- 2,706,816) of Rs 10 each in Reliance Mutual Fund 71,361 41,297 Purchase and sale of 84,400 units(March 31, 2005--6,482,528) of Rs 10 each in JM Mutual Fund - Liquid Plan 941 65,015 Purchase and sale of 66,340 units (March 31, 2005--Nil) of Rs 10 each in Birla Sunlife Mutual Fund 681 - Purchase and sale of 2,987,215 units (March 31, 2005--Nil) of Rs 10 each in ING Vysya Liquid Fund 30,000 - Purchase and sale of 8,000,000 units (March 31, 2005--Nil) of Rs 10 each in Deutsche Mutual Fund 80,000 - Purchase and Sale of 7,691 units (March 31, 2005--Nil) of Rs 10 each in Canara Liquid Fund 77 - Purchase and sale of 1,691,643 units (March 31, 2005--Nil) of Rs 10 each in Prudential ICICI Liquid Fund 20,037 - Purchase and sale of 2,501,525 units(March 31, 2005--5,053,907) of Rs 10 each of ABN AMRO Mutual Fund 25,015 50,539 Biocon Limited and Subsidiaries - Indian GAAP

D) Current and unquoted (at lower of cost and fair market value), from IPO funds 2006 2005

Nil units (March 31, 2005 -- 4,169,132) of Rs 10 each in Birla Cash Manager - 41,698 [Market Value Rs Nil (March 31, 2005 -- Rs 41,698)] Nil units (March 31, 2005 -- 5,012,424) of Rs 10 each in ABN Amro Liquid Fund - 50,124 [Market Value Rs Nil (March 31, 2005 -- Rs 50,124)] Nil units (March 31, 2005 -- 5,227,376) of Rs 10 each in Can Liquid Fund - 52,488 [Market Value Rs Nil (March 31, 2005 -- Rs 52,488)] Nil units (March 31, 2005 -- 10,393,287) of Rs 10 each in Grindlays Cash Fund - 104,007 [Market Value Rs Nil (March 31, 2005 -- Rs104,040] Nil units (March 31, 2005 -- 20,000,867) of Rs 10 each in HSBC Cash Fund - 200,090 [Market Value Rs Nil (March 31, 2005 -- Rs 200,329)] Nil units (March 31, 2005 -- 5,208,656) of Rs 10 each in ING Vysya Liquid Fund - 52,220 [Market Value Rs Nil (March 31, 2005 -- Rs 52,253)] Nil units (March 31, 2005 -- 30,495,573) of Rs 10 each in Kotak Mutual fund - 305,724 [Market Value Rs Nil (March 31, 2005 -- Rs 305,880)] Nil units (March 31, 2005 -- 8,060,298) of Rs 10 each in LIC Liquid Fund - 87,085 [Market Value Rs Nil (March 31, 2005 -- Rs 87,592)] Nil units (March 31, 2005 -- 22,711,805 ) of Rs 10 each in Prudential ICICI Liquid Plan - 269,313 [Market Value Rs Nil (March 31, 2005 -- Rs 269,313)] Nil units (March 31, 2005 -- 11,584,659) of Rs 10 each in Principal Cash Management Fund - 115,862 [Market Value Rs Nil (March 31, 2005 -- Rs 115,862] Nil units (March 31, 2005 -- 32,650,510 ) of Rs 10 each in Reliance Liquid Fund - 498,831 [Market Value Rs Nil (March 31, 2005 -- Rs 498,889)] Nil units (March 31, 2005 -- 42,129) of Rs 1,000 each in TATA Liquid Fund - 46,915 [Market Value Rs Nil (March 31, 2005-- Rs 47,304)] Aggregate amount of unquoted investments - 1,824,357 486,737 2,170,197 1,002,321 2,349,651 The following investments were purchased and sold during the year - from the IPO funds

Biocon Annual Report 2006 Financials 13351 11. Inventories 2006 2005

Raw materials 482,787 334,471 Goods-in-bond / goods-in-transit (Raw materials) 23,050 16,119 Packing materials 7,896 4,242 Work-in-progress 522,302 360,403 Finished goods 68,821 22,729 1,104,856 737,964

The inventories of Raw materials and Work-in-progress include trial run inventory of Rs 158,134 at Biocon Park, as the project is yet to commercialise its operations (Refer Note 1).

12. Sundry debtors (unsecured) 2006 2005

Debts outstanding for a period exceeding six-months Considered good 50,429 6,681 Considered doubtful 19,785 17,207 Other debts Considered good 2,186,215 1,817,788 2,256,429 1,841,676 Less: Provision for doubtful debts 19,785 17,207 2,236,644 1,824,469

Other debts include unbilled revenues of Rs 15,089 (March 31, 2005 - Rs Nil) with respect to services rendered to customers.

13. Cash and bank balances 2006 2005

Cash on hand 1,239 1,447 Balances with scheduled banks: In current accounts 2,721 18,476 In deposit accounts 16,276 14,315 20,236 34,238

(b) Syngene has term deposits of Rs Nil (March 31, 2005 - Rs 7,000) under the ﬂexi-deposit account allowing Syngene to avail overdraft facility upto Rs Nil (March 31, 2005 - Rs 7,000) at an interest rate of 2 per cent above the term deposit rate.

(c) Balances with scheduled banks in current accounts include balance in unclaimed dividend account of Rs 725 (March 31, 2005 - Rs 252).

(d) Balances with scheduled banks in current accounts and deposit account include the balances of the ESOP Trust of Rs 1,298 (March 31, 2005 - Rs 143) and Rs 16,276 (March 31, 2005 -- Rs 4,315) respectively.

14. Loans and advances (Unsecured and considered good) 2006 2005

Advances recoverable in cash or in kind or for value to be received 44,878 30,273 Duty drawback receivable, net of provision of Rs 534 (March 31, 2005 -- Rs 1,446) 23,101 26,772 Deposits 40,643 38,198 Balances with Customs, Excise and Sales tax Authorities 129,923 74,711 Shares held by ESOP trust 905 935 239,450 170,889 Biocon Limited and Subsidiaries - Indian GAAP

15. Current liabilities and provisions 2006 2005 Current liabilities Sundry creditors Capital 872,573 1,075,285 Others 1,057,091 860,635 Advances from customers 57,537 68,516 Balance in current account with bank represents book overdraft 19,586 7,040 Interest accrued but not due 36 201 Investor Education and Protection Fund to be credited by :- Unclaimed dividend 725 252 Other liabilities 176,225 102,728 2,183,773 2,114,657

Provisions for Proposed dividend 250,000 200,000 Tax on proposed dividend 35,063 28,050 Gratuity 15,820 22,334 Superannuation 2,645 23,963 Bonus 30,700 37,077 Leave encashment 66,938 49,258 Provision for taxation, net of advance tax 27,650 11,844 428,816 372,526 2,612,589 2,487,183 (a) Provision for tax includes provision for fringe beneﬁt tax of Rs 517 (Refer Note 22)

(b) Other liabilities include Rs 1,073 (March 31, 2005 -- Rs 4,596) due to Ms Kiran Mazumdar Shaw, Managing Director and Rs Nil (March 31, 2005 -- Rs Nil) to Mr JMM Shaw, Director and the maximum amount outstanding at any time during the period was Rs 5,530 (March 31, 2005 - Rs 4,596) and Rs 366 (March 31, 2005 - Rs 366) respectively.

16. Other income 2006 2005

Interest income from investments [gross of tax deducted at source - Rs 233 (2005 - Rs 438)] 1,514 2,543 Dividend income On investment of IPO funds 21,508 109,779 Others 14,571 11,021 Proﬁt on sale of investments 2,753 2,296 Gain on ﬁxed assets sold, net 346 Write back of liabilities - 13,185 Miscellaneous income 10,754 17,423 51,446 156,247

Biocon Annual Report 2006 Financials 13551 17. Manufacturing, contract research and other expenses 2006 2005

Raw materials consumed, net of duty drawback of Rs 41,356 (2005 - Rs 40,758) 4,122,984 3,579,555 Purchase of goods for resale 86,546 28,046 Employee costs Salaries, wages, bonus, etc 513,726 435,784 Group's contribution to provident and other fund 25,612 20,329 Gratuity, superannuation, leave encashment 31,993 57,785 Employee stock compensation expense (See Note 2 (a), 4 & 20) 9,467 23,396 Directors sitting fees 900 720 Welfare expenses 37,116 30,879 Operating and other expenses: Royalty and technical fees 4,768 1,087 Rent 2,849 2,675 Communication expenses 26,285 24,887 Travelling and conveyance 78,224 72,560 Professional charges 51,984 43,581 Power and fuel 336,866 255,726 Insurance 14,589 13,499 Rates, taxes and fees 4,026 7,628 Lab consumables 33,373 22,203 Repairs and maintenance Plant and machinery 65,672 79,986 Buildings 8,217 14,784 Others 29,333 22,607 Selling expenses Freight outwards and clearing charges 50,542 42,714 Sales promotion expenses 58,170 33,164 Commission and brokerage 60,060 52,722 Bad debts written off 1,501 200 Provision for bad and doubtful debts 2,578 1,249 Exchange ﬂuctuation (net) (27,248) (26,278) Loss/(gain) on forward cover contracts, net 25,059 (5,340) Printing and stationery 8,913 12,451 Provision for dimunition of investments - 127 Miscellaneous expenses 136,443 68,775 5,800,548 4,917,501 (Increase)/decrease in inventories of ﬁnished goods and work-in-progress: Opening inventories: Finished goods 22,729 17,383 Work-in-progress 360,403 335,329 383,132 352,712 Closing inventories: Finished goods (68,821) (22,729) Work-in-progress (522,302) (360,403) (591,123) (383,132) (207,991) (30,420) 5,592,557 4,887,081

(i) Power and fuel cost of Rs. 185,606 (March 31, 2005 - Rs Nil) and employee costs of Rs 35,513 (March 31, 2005 - Rs Nil) for the year ended March 31, 2006 have been transferred to capital work in progress, which include salaries, wages and bonus - Rs 33,134; Contribution to provident and other funds - Rs 872 ; Gratuity and leave encashment - Rs 1,507 as it relates to construction and installation of new facility at the Biocon Park.

(ii) Legal and professional charges of Rs 20,977 (March 31, 2005 - Rs Nil) identiﬁable to acquisition of intellectual property rights ('IPRs') have been transferred to capital work in progress. Biocon Limited and Subsidiaries - Indian GAAP

18. Research and development expenses Research and development expenses aggregate to Rs 411,305 (March 31, 2005 - Rs 245,526) and include Rs 197,241 (March 31, 2005 - Rs 99,900) on research and development equipment and Rs 18,327 (March 31, 2005 - Rs 3,466) on buildings and the remaining expenses incurred by the Company have been disclosed under the appropriate account heads.

19. Interest and ﬁnance charges 2006 2005

Interest paid on : Others 17,590 18,564 17,590 18,564 Less : Interest received from suppliers [Gross of tax deducted at source Rs 54 (2005 - Rs Nil)] (8,850) (7,008) 8,740 11,556 Bank charges 8,808 8,726 17,548 20,282

20. Employee stock compensation On September 27, 2001, Biocon's Board of Directors approved the Biocon Employee Stock Option Plan ('ESOP Plan 2000') for the grant of stock options to the employees of the Group. A compensation committee has been constituted to administer the plan through the ESOP Trust.

The Trust purchases equity shares of Biocon using the proceeds from the loan obtained from Biocon and will subscribe to such number of shares as is necessary for transferring to the employees. The total number of equity shares transferred to the Trust shall not exceed 250,000 equity shares (pre-bonus and pre-split) of Rs 10 each and shares transferred to each employee will not exceed 10,000 equity shares (pre-bonus and pre-split) of Rs 10 each. The Compensation Committee shall determine the exercise price which will not be less than the face value of the shares. The Compensation Committee had granted 71,510 options under the ESOP Plan 2000 to be exercised at a grant price of Rs 10 (pre-bonus and pre-split). The options will vest with the employees equally over a four year period from the grant date. In case the employee resigns from employment, the rights relating to shares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balance shares shall be forfeited in favour of the ESOP Trust.

The Compensation Committee has granted 142,100 options under the ESOP Plan 2000 effective January 1, 2004 to be exercised at a grant price of Rs 5. The options vest with the employees equally over a four year period from January 1, 2005.

On January 18, 2004, the Board of Directors announced the Biocon Employees Stock Option Plan (ESOP Plan 2004) for the grant of stock options to the employees of the Company, pursuant to which, the Compensation Committee on March 19, 2004 granted 422,000 options under the ESOP Plan 2004 to be exercised at a grant price of Rs 315 being the issue price determined for the IPO through the book building process. The options will vest with the employees equally over a four year period from April 1, 2005.

Biocon Annual Report 2006 Financials 13751 The Trust had 4,432,567 (March 31, 2005 -- 5,402,189) equity shares of Rs 5 each as at March 31, 2006 and a summary of the activity of the Trust is as follows:

Particulars Exercise Price 2006 2005

Opening balance of equity shares not granted to employees and available with the Trust Rs 5 each 3,138,332 3,082,240 Add: Options cancelled and lapsed 70,383 56,092 Closing balance of shares not granted to employees and available with the Trust 3,208,715 3,138,332

Options granted and exercised at year end 2,590,533 1,620,911 Options granted and eligible for exercise at year end 235,200 97,952 Options granted but not eligible for exercise at year end 988,652 2,165,905

Total employee stock compensation cost as at year end 91,790 94,129

Vesting period of options -- Primarily progressively over four years

Employee stock compensation expense -- Amortised during the year 9,467 23,396

21. Reconciliation of basic and diluted shares used in computing EPS

22. Current taxes

The current tax charge of Rs 236,883 (March 31, 2005 - Rs 128,341) is based on the earnings for the year ended March 31, 2006 net of write backs of Rs 2,681 with respect to earlier year provisions. In addition, the Company has, during the period, provided Rs 5,853 towards fringe beneﬁt tax as introduced by the Government under the Finance Act, 2005. Biocon Limited and Subsidiaries - Indian GAAP - - - 57 (4,596) Balance as at March 31, 2005 March (Payable)/receivable - 502 9,593 9,011 10,261 April 1, 2004 to March 31, 2005 to March - - - - (1,073) Balance as at March 31, 2006 March (Payable)/receivable 90 9,384 1,189 8,865 10,339 April 1, 2005 to March 31, 2006 March (THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK) HAS BEEN INTENTIONALLY (THIS SPACE Description R & D fees Lease Rentals Salary and perquisites Salary and perquisites of vials Purchase Relationship Managing Director Director Partner Joint Venture Relative of Director Kiran Mazumdar Shaw JMM Shaw CIMAB P K Associates Name of the related party Name of the related 1 2 3 4 Sl No 23. Related party transactions

Biocon Annual Report 2006 Financials 13951 24. Provisions Balance at the Additions Amount paid Balance at the beginning of during the during the end of the the year year year year Particulars

Leave encashment 49,258 17,680 - 66,938 Bonus 37,077 66,927 73,304 30,700 Superannuation 23,963 - 21,318 2,645 Gratuity 22,334 15,820 22,334 15,820 Proposed dividend 200,000 250,000 200,000 250,000 Tax on proposed dividend 28,050 35,063 28,050 35,063 360,682 385,490 345,006 401,166

25. Commitments 2006 2005 (a) Capital commitments Estimated amount of contracts remaining to be executed on capital account and not provided for, net of advances 479,428 1,367,825

(b) Operating lease commitments (i) Rent : The Group has entered into lease agreements for lease of premises which expires between 2008 to 2015. Gross rental expenses for the year ended March 31, 2006 aggregate to Rs 570 (March 31, 2005 - Rs 480) The committed lease rental in the future are: Not later than one year 669 480 Later than one year and not later than ﬁve years 2,195 1,710 Later than ﬁve years 1,625 -

(ii) Vehicles : The Group has taken vehicles for certain employees under operating leases, which expire from December 2008 to January 2010. Gross rental expenses for the year ended March 31, 2006 aggregate to Rs 5,794 (March 31, 2005 - Rs 6,450). The committed lease rental in the future are: Not later than one year 6,334 5,430 Later than one year and not later than ﬁve years 8,430 11,726

26. Contingent liabilities (a) Taxation matters under appeal 12,900 9,895 (b) Corporate guarantees (i) Corporate guarantee given in favour of CED in respect of certain 217,500 217,500 performance obligations of Syngene. (ii) Corporate guarantee given in favour of CED in respect of certain 465,000 315,000 performance obligations of Biocon. (iii) Corporate guarantee given in favour of CED in respect of certain 131,352 46,239 performance obligations of BBPL (iv) Corporate guarantee given in favour of CED in respect of certain 4,976 - performance obligations of Clinigene

The Group is informed that the necessary terms and conditions have been complied with and no liability has arisen.

27. Details of utilisation of proceeds raised through public issue Capital work-in-progress [Note 1(a)] 3,150,000 1,325,643 Current investments -- Liquid money market mutual funds [Refer Note 10] - 1,824,357 3,150,000 3,150,000

28. Foreign exchange option contracts

The Company has entered into option contracts to hedge highly probable forcasted forex transactions. As at March 31, 2006, the Company has currency option contracts to sell US$ 27 Million over the period beginning October 2006 to September 2007 in respect of the forcasted transactions. The impact of marked to market of these option contracts is Rs 24 Million (gain) as at March 31, 2006 which has not been recognised in the proﬁt and loss account in accordance with the Companys' accounting policy. Biocon Limited and Subsidiaries - Indian GAAP

29. Segmental information Business segments The primary reporting of the Group has been performed on the basis of business segment. The Group is organised into three business segments, enzymes, active pharmaceutical ingredients ('Pharma') and contract research services. Segments have been identiﬁed and reported based on the nature of the products, the risks and returns, the organisation structure and the internal ﬁnancial reporting systems.

April 1, 2005 to March 31, 2006 Particulars Enzyme Pharma Contract Research Joint Venture Unallocated Eliminations Total Revenues External sales 849,563 6,025,361 1,005,756 - - - 7,880,680 Inter-segment transfers 72,294 - - - - (72,294) - Total revenues 921,857 6,025,361 1,005,756 - - (72,294) 7,880,680 Costs Segment costs (523,481) (3,660,753) (497,049) - - - (4,681,283) Inter-segment transfers - (72,294) - - - 72,294 - Result Segment result 398,376 2,292,314 508,707 - - - 3,199,397 Corporate expenses - - - (19,859) (891,415) - (911,274) Other income - - 14,921 - 35,011 - 49,932 Interest income - - 1,134 - 380 - 1,514 Operating proﬁt 2,339,569 Depreciation (26,911) (142,463) (68,003) (31) (59,124) - (296,532) Interest expense - - (577) (85) (16,886) - (17,548) Income taxes - Current and deferred - - - - (305,654) - (305,654) Minority Interest - - - - 19,688 - 19,688 Net proﬁt 1,739,523

Other information Segment assets 626,616 8,864,941 1,515,470 654,492 - - 11,661,519 Unallocated corporate assets - - - - 1,212,073 - 1,212,073 Total assets 12,873,592

Segment liabilities 138,006 1,751,748 265,688 146,536 - - 2,301,978 Unallocated corporate liabilities - - - - 1,658,411 - 1,658,411 Total liabilities 3,960,389

Capital expenditure 10,073 114,648 311,385 - 335,361 - 771,467

April 1, 2004 to March 31, 2005 Particulars Enzyme Pharma Contract Research Joint Venture Unallocated Eliminations Total Revenues External sales 896,814 5,566,810 662,040 - - - 7,125,664 Inter-segment transfers 84,128 - - - - (84,128) - Total revenues 980,942 5,566,810 662,040 - - (84,128) 7,125,664 Costs Segment costs (505,705) (3,407,711) (336,158) - (36,354) - (4,285,928) Inter-segment transfers - (84,128) - - - 84,128 - Result Segment result 475,237 2,074,971 325,882 - -36,354 - 2,839,736 Corporate expenses - - - (20,569) (580,584) - (601,154) Other income - - - - 153,704 - 153,704 Interest income - - - - 2,543 - 2,543 Operating proﬁt 2,394,829 Depreciation (26,386) (105,274) (42,484) (31) (49,270) - (223,445) Interest expense - - (342) (8) (19,932) - (20,282) Income taxes - Current and deferred - - - - (186,067) - (186,067) Minority Interest - - - - 10,414 - 10,414 Net proﬁt 1,975,449

Other information Segment assets 636,117 6,519,171 851,700 139,019 - - 8,146,007 Unallocated corporate assets - - - - 2,753,025 - 2,753,025 Total assets 10,899,032

Segment liabilities 132,476 1,917,232 213,895 18,596 - - 2,282,199 Unallocated corporate liabilities - - - - 1,202,805 - 1,202,805 Total liabilities 3,485,004

Capital expenditure 18,917 568,327 364,594 - 202,530 - 1,154,368

Biocon Annual Report 2006 Financials 14151 Geographical segments Secondary segmental reporting is performed on the basis of the geographical location of customers. The operations of the Group comprise export sales and contract research fees contributing to approximately 59 per cent (2005 -- 62 per cent). The management views the Indian market and export markets as distinct geographical segments. The following is the distribution of the Group's sale by geographical markets

Revenues, net 2006 2005 India 3,290,600 2,710,718 Exports on FOB basis 4,590,080 4,414,946 Total 7,880,680 7,125,664

Assets and additions to ﬁxed assets by geographical area - The following is the carrying amount of segment assets and additions to ﬁxed assets by geographical area in which the assets are located:

Carrying amount of segment assets 2006 2005

India 11,308,630 9,963,442 Outside India 1,564,962 935,590 12,873,592 10,899,032

Carrying amount of segment assets outside India represents receivables from export sales.

Segment revenue and result The expenses that are not directly attributable and that cannot be allocated to a business segment on a reasonable basis are shown as unallocated corporate expenses.

Inter-segment transfers Segment revenue, segment costs and results include transfers between business segments. Such transfers have been made at cost. The inter - segment transfers have been eliminated on consolidation of the segments.

30. Prior year comparatives The previous years' figures have been re-grouped/ reclassified, where necessary to conform to current years' classification.

S.R. BATLIBOI & ASSOCIATES For and on behalf of the Board of Directors Chartered Accountants

Prashant Singhal Kiran Mazumdar Shaw JMM Shaw Partner Managing Director Director Membership No: 93283

Bangalore Murali Krishnan K N Usha T N April 20, 2006 President - Group Finance Company Secretary Biocon Limited and Subsidiaries - Indian GAAP

Summarised statement of ﬁnancials of Subsidiary Companies (all amounts in Indian Rupees thousands)

Syngene Clinigene Biocon International International Biopharmaceuticals Private Limited Private Limited Private Limietd

Capital 28,750 500 132,000 *

Reserves 1,021,172 (61,755) (66,373)

Total Assets 1,292,496 223,581 695,845

Total Liabilities 242,574 284,836 630,218

Investments 486,737 - - (except in subsidiaries)

Turnover 981,730 56,580 -

Proﬁt before tax 483,618 (10,937) (40,166)

Proﬁt after tax 452,107 (11,109) (40,233)

Dividend declared Nil Nil Nil

* - including share application money

The Company has obtained exemption from the Ministry of Company affairs, Government of India, from attaching the ﬁnancial accounts of the subsidiary companies to this Report. The members can however, obtain the copy of the detailed annual accounts of the subsidiary companies and related information by making a request to that effect. A copy of the same shall also be available for inspection at the registered ofﬁce of the Company.

Biocon Annual Report 2006 Financials 14351 [THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK] Biocon Limited and Subsidiaries - US GAAP

Biocon Limited and Subsidiaries US GAAP

REPORT OF INDEPENDENT AUDITORS

To the Stockholders of Biocon Limited :

We have audited the accompanying consolidated balance sheets of Biocon Limited (the “Company”) as of March 31, 2006 and 2005, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with United States generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2006 and 2005 and the consolidated results of its operations and its cash flows for the years then ended, in conformity with United States generally accepted accounting principles.

Ernst & Young

Bangalore, India April 20, 2006

Biocon Annual Report 2006 Financials 14551 BIOCON LIMITED CONSOLIDATED BALANCE SHEETS (All amounts in thousands) March 31, 2006 March 31, 2006 March 31, 2005 In US$ In Rs In Rs ASSETS Current assets Cash and cash equivalents 60 2,662 19,780 Investments in marketable securities 10,945 486,831 2,172,018 Restricted time deposits - - 10,000 Trade receivables, net 50,284 2,236,644 1,824,469 Employee receivables 120 5,332 5,425 Inventories 24,839 1,104,856 737,964 Deferred income taxes 499 22,209 18,680 Prepaid expenses and other current assets 4,799 213,450 126,176 Total current assets 91,546 4,071,984 4,914,512

Goodwill 495 22,002 22,002 Property, plant and equipment, net 169,912 7,557,674 5,610,068 Intangible assets 7,611 338,541 - Other invetsments 3,980 177,030 179,441 Investment in Joint Venture, net 21 947 - Loan to Joint Venture Company 10,369 461,197 102,565 Employee receivables 165 7,354 12,755 Other assets - 13 24,313 TOTAL ASSETS 284,099 12,636,742 10,865,656

LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable 44,217 1,966,770 2,060,282 Advance from customers 1,294 57,537 68,516 Short term borrowings 15,673 697,135 500,319 Accrued employee beneﬁts 1,538 68,431 84,209 Income taxes payable 630 28,044 11,901 Other current liabilities 17 761 201 Total current liabilities 63,369 2,818,678 2,725,428

Deferred income taxes, net 10,367 461,131 342,451 Long term debt 32 1,410 - Deferred sales taxes liability 8,352 371,517 270,136 TOTAL LIABILITIES 82,120 3,652,736 3,338,015

Stockholders' equity Common stock, (Rs 5 par value; 120,000,000 equity shares authorised : 100,000,000 equity shares issued and outstanding) 11,241 500,000 500,000 Additional paid-in capital 75,388 3,353,262 3,355,601 Deferred compensation cost (115) (5,129) (16,935) Accumulated other comprehensive income 2 93 1,821 Retained earnings 115,463 5,135,780 3,687,154 Total stockholders' equity 201,979 8,984,006 7,527,641

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 284,099 12,636,742 10,865,656

See accompanying notes

Kiran Mazumdar Shaw JMM Shaw Managing Director Director

Bangalore April 20, 2006 Biocon Limited and Subsidiaries - US GAAP

BIOCON LIMITED CONSOLIDATED STATEMENTS OF INCOME (All amounts in thousands, except share data including share price) March 31, 2006 March 31, 2006 March 31, 2005 In US$ In Rs In Rs REVENUES Sale of products, net of excise duty of Rs 371,789 (March 31, 2005 -- Rs 378,423 ) and sales tax of Rs 138,522 (March 31, 2005 -- Rs 131,578) 154,562 6,874,924 6,463,624 Contract research services 22,611 1,005,756 662,040 177,173 7,880,680 7,125,664 Cost of revenues Cost of products sold 94,070 4,184,234 3,913,416 Cost of contract research services 11,175 497,049 336,158

Gross proﬁt 71,928 3,199,397 2,876,090

Research and development expenses 4,401 195,737 146,632 Selling, general and administrative expenses 15,237 677,720 476,117 Depreciation 6,589 293,083 220,196 INCOME FROM OPERATIONS 45,701 2,032,857 2,033,145

Interest expense 395 17,548 20,282 Interest income (34) (1,514) (2,543) Other income, net (1,123) (49,932) (140,519) Foreign exchange gain (49) (2,189) (31,618) Share of losses in Joint Venture 905 40,234 21,284 INCOME BEFORE INCOME TAXES 45,607 2,028,710 2,166,259

Provision for income taxes 7,914 352,034 247,429

NET INCOME 37,693 1,676,676 1,918,830

Earnings per share Basic 0.40 17.59 20.26 Diluted 0.39 17.42 19.86

Weighted average number of common shares used in computing earnings per share Basic 95,305,796 95,305,796 94,695,763 Diluted 96,223,885 96,223,885 96,621,084 See accompanying notes

Kiran Mazumdar Shaw JMM Shaw Managing Director Director

Bangalore April 20, 2006

Biocon Annual Report 2006 Financials 14751 BIOCON LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (All amounts in thousands)

Indian Rupees Particulars Common Stock Deferred Additional compensation Accumulated Other Retained Shares Amount paid-in capital cost Loan to Trust comprehensive income earnings Total

Balance as of March 31, 2004 100,000 500,000 3,356,260 (40,990) (1,259) - 1,881,137 5,695,148 - - Repayment of loan by Trust - - - - 1,259 - - 1,259 Forfeiture of stock option grants - - (659) 659 - - - - Amortisation of compensation costs - - - 23,396 - - - 23,396 Comprehensive income: Net income ------1,918,830 1,918,830 Unrealised gain on securities available for sale - - - - - 1,821 - 1,821 Comprehensive income ------1,920,651 Dividends paid including dividend tax ------(112,813) (112,813)

Balance as of March 31, 2005 100,000 500,000 3,355,601 (16,935) - 1,821 3,687,154 7,527,641

Forfeiture of stock option grants - - (2,339) 2,339 - - - - Amortisation of compensation costs - - - 9,467 - - - 9,467 Comprehensive income: Net income ------1,676,676 1,676,676 Trasnfer from unrealized gain to realised gain - - - - - (1,821) - (1,821) Unrealised gain on securities available for sale 93 - 93 Comprehensive income ------1,674,948

Dividends paid including dividend tax ------(228,050) (228,050) Balance as of March 31, 2006 100,000 500,000 3,353,262 (5,129) - 93 5,135,780 8,984,006

In US $ 100,000 11,241 75,388 (115) - 2 115,463 201,979

See accompanying notes Kiran Mazumdar Shaw JMM Shaw Managing Director Director

Bangalore April 20, 2006 Biocon Limited and Subsidiaries - US GAAP

BIOCON LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS (All amounts in thousands) March 31, 2006 March 31, 2006 March 31, 2005 In US $ In Rs In Rs CASH FLOWS FROM OPERATING ACTIVITIES Net income 37,694 1,676,676 1,918,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,589 293,083 220,196 Amortisation of employee compensation cost 213 9,467 23,396 Provision for doubtful receivables 58 2,578 1,250 Bad debts written off 34 1,501 200 Gain on assets sold (8) (346) - Gain on sale of marketable securities (62) (2,753) (2,296) Dividend on mutual fund units (811) (36,079) (120,800) Unrealised exchange gain (207) (9,198) (2,802) Deferred tax assets and liabilities 2,589 115,151 119,089 46,089 2,050,080 2,157,063 Changes in assets and liabilities: Trade receivables (9,263) (412,002) (639,821) Employee receivables 124 5,494 3,815 Inventories (8,248) (366,892) 118,595 Prepaid expenses and other assets (1,416) (62,974) 54,868 Current liabilities and non current liabilities 4,735 210,593 11,021 Net cash provided by operating activities 32,021 1,424,299 1,705,541

CASH FLOWS FROM INVESTING ACTIVITIES Investment in marketable securities (65,192) (2,899,742) (14,150,992) Sale of marketable securities 103,101 4,585,954 12,204,505 Purchase of other investments (1,960) (87,195) (179,441) Investment in Joint Venture, net (21) (947) - Dividend received 811 36,079 120,800 Redemption of restricted time deposits 225 10,000 3,144,203 Purchase of property, plant and equipment (57,313) (2,549,286) (2,745,936) Purchase of intangible assets (5,597) (248,935) - Sale of property, plant and equipment 11 500 - Net cash used in investing activities (25,935) (1,153,572) (1,606,861)

CASH FLOWS FROM FINANCING ACTIVITIES Repayment of loan by Trust - - 1,259 Loan to Joint Venture Company (8,063) (358,632) (102,565) Receipt of short-term borrowings from banks 4,408 196,046 24,625 Repayment of long term debt - - (24) Receipt of long term debt 32 1,410 - Deferred sales tax credit 2,279 101,381 95,479 Dividends and dividend tax paid (5,127) (228,050) (112,813) Net cash used in ﬁnancing activities (6,471) (287,845) (94,039)

Net change in cash and cash equivalents (385) (17,118) 4,641 Cash and cash equivalents at the beginning of the year 445 19,780 15,139 Cash and cash equivalents at the end of the year 60 2,662 19,780 SUPPLEMENTARY DISCLOSURE FOR CASH ACTIVITIES Cash paid for interest 575 25,555 21,024 Cash paid for income taxes 5,102 226,934 63,207

See accompanying notes Kiran Mazumdar Shaw JMM Shaw Managing Director Director

Bangalore April 20, 2006

Biocon Annual Report 2006 Financials 14951 BIOCON LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2006 (All amounts in thousands, except share data including share price)

1. Company overview and description of business 1.1 Incorporation and history Biocon Limited ('Biocon' or 'the Company') was incorporated in 1978 under the laws of India and controlled by Ms Kiran Mazumdar Shaw (“KMZ”), along with her husband Mr John M M Shaw (“JMM”) and her brother Mr Ravi Mazumdar (“RM”) directly and through Glentec International Limited (“Glentec”), a company incorporated under the laws of Mauritius and controlled by the above persons. KMZ, JMM, RM and Glentec are collectively hereinafter referred to as “the Control Group”. The Company has its registered ofﬁce at 20th KM, Hosur Road, Electronic City PO, Bangalore, India.

As of March 31, 2006, the Company has a controlling interest in the following entities:

• Syngene International Private Limited (“Syngene”), a 99.99 per cent owned subsidiary company incorporated in November 1993 under the laws of India.

• Clinigene International Private Limited (“Clinigene”), a 100 per cent owned subsidiary company incorporated in August 2000 under the laws of India.

Biocon entered into an Agreement on February 22, 2002 to set up a Joint Venture Company, Biocon Biopharmaceuticals Private Limited (“BBPL”) with CIMAB SA (“CIMAB”), a company organised and existing under the laws of Cuba and engaged in research, development, manufacturing and marketing of biopharmaceuticals, to manufacture and market products using CIMAB technology and to carry out research activities. Biocon holds 51% of BBPL’s equity. Biocon and CIMAB have equal participation rights, in the operations of BBPL, therefore the investment in the joint venture BBPL has been accounted based on the equity method of accounting as prescribed under Accounting Principle Board Opinion No 18 “The Equity Method of Accounting for Investments in Common Stock”. BBPL has not yet commenced operations and has no revenues. Biocon is responsible for ﬁnancing the capital expenditure requirements of BBPL. It is expected that the joint venture partner will provide their share of the capital invested by Biocon in the form of technology and design transfers.

Biocon, together with its subsidiaries, Syngene and Clinigene are hereinafter collectively referred to as “the Group”.

1.2 Operations The Group's principal areas of operations are as follows:

Bio-Pharmaceuticals The pharmaceuticals business comprises the manufacture and development of active pharmaceutical ingredients (‘API’) bulk drugs, with focus on products involving fermentation and/or synthetic conversion. The bio-pharmaceuticals business primarily seeks to leverage from the expiry of product patents for Simvastatin, Lovastatin, Atorvastatin and Pravastatin (“Statins”) that expire between 2001 and 2009, through research capabilities and fermentation and synthetic chemistry skills that have been developed over the years within the Group.

Enzymes The enzymes business comprises the development, manufacture and sale of single component enzymes, proprietary formulations and enzyme systems to cater to the demand of a number of diverse industries including food and beverages, textiles, starch, brewing and distilling.

Contract research The Group provides contract research services to overseas and domestic customers and is primarily engaged in the following areas of such research:

• Molecular biology; • Synthetic chemistry; • Bio informatics; and • Clinical research on well-deﬁned and characterised patients suffering from chronic diseases such as, diabetes, osteoporosis and asthma.

2. Significant Accounting Policies 2.1 Basis of presentation of financial statements (a) The accompanying consolidated financial statements include Biocon and its subsidiaries (“the Group”) and are prepared in conformity with United States generally accepted accounting principles (“US GAAP”) to reflect the consolidated financial position and the consolidated results of operations of the Group. Biocon consolidates entities in which it owns or controls more than 50% of voting shares, except as explained below. All material transactions and balances between the Group entities have been eliminated. Biocon Limited and Subsidiaries - US GAAP

(b) The Group accounts for investments in the joint venture, BBPL by the equity method of accounting as its joint venture partner has participating rights over the operating and financing policies of BBPL. The Group has recognised the entire accumulated loss of BBPL, amounting to Rs 66,373 and Rs 26,140 as at March 31, 2006 and 2005, respectively, in these consolidated financial statements as it is entirely responsible for funding the operating cash flow requirements. The carrying value of the investment in BBPL was Rs 947 and Rs Nil as at March 31, 2006 and 2005, respectively.

(c) For the convenience of readers, the balance sheet as of March 31, 2006 and the statement of income for the year then ended have been translated into United States Dollars ('US$') using the Federal Reserve Bank of New York’s noon buying rate as conﬁrmed by Hong Kong and Shanghai Banking Corporation ('HSBC') as of March 31, 2006 which was 1US$ = Rs 44.48. The convenience translation should not be construed as a representation that the Rs amounts or the US$ amounts referred to in these ﬁnancial statements have been, could have been, or could in the future be, converted into US$ or Rs, as the case may be, at this or at any other rate of exchange, or at all.

(d) The Group also separately prepares its consolidated ﬁnancial statements for the same period in accordance with accounting principles generally accepted in India (“Indian GAAP”). The principle differences between Indian GAAP and US GAAP relate to the treatment of certain deferred tax items, the method of charging depreciation, accruing for vacation pay and gratuity and the accounting for the joint venture.

(e) Certain reclassiﬁcations have been made to conform prior period data to the current presentation. These reclassiﬁcations had no effect on reported earnings.

2.2 Use of estimates The preparation of consolidated ﬁnancial statements in conformity with generally accepted accounting principles requires management of the Group to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the results of operations during the reporting periods. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from those estimates.

2.3 Foreign currency transactions Monetary assets and liabilities in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the balance sheet date. Transactions in foreign currencies are remeasured into functional currency at the rates of exchange prevailing at the date of the transaction. All foreign exchange gains and losses are recorded in the consolidated statements of income.

2.4 Revenue recognition The Group has two revenue streams, the sale of products and contract research services. The respective accounting policies are as follows:

(i) Revenue from sale of products Revenue is recognised when signiﬁcant risks and rewards in respect of ownership of the products are transferred to the customer. Revenue is recognised when the following criteria are met: • Persuasive evidence of an arrangement exists; • The price to the buyer is ﬁxed and determinable; and • Collectibility of the sales price is reasonably assured.

Revenue from domestic sales is recognised on despatch of the products to customers, from the factories of the Group. Revenue from export sales is recognised on shipment of products. Revenues do not include shipping and handling charges reimbursed by the customers amounting to Rs 4,650 and Rs 4,970 during the year ended March 31, 2006 and 2005, respectively.

(ii) Contract research revenues Revenues from contract research services comprise fees received for research activities carried out for customers in the ﬁelds of molecular biology and synthetic chemistry. Research activities are based on contracts that specify the nature of activity to be carried out, basis of billings, manner of payments and are typically in the nature of time and material contracts. Revenues are recognised as services are rendered, in accordance with the terms of the contracts.

Revenue from integrated research and development and contract manufacturing arrangements is recognized only when the remaining obligations under such contracts are determined to be inconsequential or perfunctory. Up-front payments received under such arrangements are deferred and are recognized in the income statements over the period in which the Company perform services or when the Company has completed all its performance obligations.

Biocon Annual Report 2006 Financials 15151 2.5 Cost of revenues Cost of products sold comprises costs of direct labour, amortisation of deferred stock compensation, material costs and other direct costs incurred in producing bulk drugs and enzymes but exclude depreciation. Costs of contract research services comprise costs of direct labour, amortisation of deferred stock compensation, material costs and other direct costs related to the Groups' research activities but excludes depreciation.

2.6 Research and development costs Research and development costs are expensed as incurred. Capital expenditure incurred on equipment and facilities acquired or constructed for research and development activities and having alternative future uses, are capitalised as property, plant and equipment and depreciated over their economic useful life. Costs of acquired technology/know-how having no alternate use are expensed as incurred.

2.7 Cash and cash equivalents All highly liquid investments with original maturities of ninety days or less are considered to be cash equivalents.

2.8 Marketable securities Management determines the appropriate classiﬁcation of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. As of March 31, 2006 and 2005, all marketable securities were classiﬁed as available-for-sale and consisted of units of highly liquid mutual funds whose cost closely approximates the fair market value.

Available-for-sale securities are carried at fair market value and changes in the fair market value are recorded, net of taxes as comprehensive income (loss) and reported in accumulated other comprehensive income (loss), as a separate component of stockholders’ equity. A decline in the fair market value below original cost is recorded in the income statement when it is considered to be other than temporary.

2.9 Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined on a first in first out basis for all categories of inventories. Cost in the case of raw materials and packing materials comprises the purchase price and attributable direct costs, less trade discounts. Cost in the case of work-in-progress and finished goods comprise material costs, direct labour, and production overheads.

Inventories are reviewed on a regular basis for identiﬁcation of slow-moving and obsolete inventory, which are written down in the period of identiﬁcation and are included in cost of products sold.

2.10. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Equipment held under capital leases are stated at the present value of minimum lease payments at the inception of the leases. Advances paid towards acquisition of property and equipment and the cost of property and equipment not put to use before the balance sheet date are classiﬁed as capital work-in-progress.

The interest cost incurred for funding an asset during its construction period is capitalised based on the actual investment in the asset and the average cost of funds. The capitalised interest is included in the cost of the relevant asset and is depreciated over the estimated useful life of the asset.

Depreciation is computed using the straight-line method over the estimated useful lives of assets. Depreciation of equipment held under capital leases is computed using the straight-line method over the shorter of the assets' estimated lives and the lease term.

Costs of normal repairs and maintenance are charged to income as incurred. Major replacements or betterment of property, plant and equipment are capitalised. During the year ended March 31, 2006 and 2005 the Group has incurred Rs 73,889 and Rs 94,770, respectively, towards normal repairs and maintenance.

2.11 Impairment of long-lived assets The Group reviews long-lived assets for impairment, whenever an event or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The carrying values of long-lived assets are assessed for recoverability by reference to the estimated future undiscounted cash flows associated with them. Where this assessment indicates a deficit, the assets are written down to market value. For assets, which do not have a readily determinable market value, the assets are written down to their estimated market value, calculated by reference to the estimated future discounted cash flows. Assets to be disposed are reported at the lower of the written down value and the fair value, less the cost to sell. Biocon Limited and Subsidiaries - US GAAP

2.12. Goodwill Goodwill represents the excess of cost over the fair value of net tangible and identiﬁable intangible assets of acquired businesses. Goodwill is not amortized but is instead subjected to a periodic impairment test at least annually.

The impairment test is conducted at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Fair value is primarily determined by computing the future discounted cash ﬂows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it were less, an impairment loss would be recognized for the difference.

2.13 Other Investments Investments in unquoted equity where the Group owns less than 20% of the voting interest and debt securities held to maturity are accounted for at cost. A decline in fair value below original cost is recorded in the income statement when it is considered to be other than temporary.

2.14 Operating leases Lease rental expenses on operating leases are charged to expense over the lease term on a straight-line basis.

2.15 Employee benefits In accordance with Indian law, all employees of the Group are entitled to receive benefits under the Provident Fund, a defined contribution plan in which both the employee and the Group contribute monthly at a determined rate (currently 12 per cent of the employees' base salary). These contributions are made to the Government Provident Fund. Contributions to defined contribution plans are charged to income in the period in which they accrue. The Group has no further obligation under the Provident Fund, beyond its contributions.

In accordance with Indian law, the Group provides for gratuity, a defined benefit retirement plan (‘the Gratuity Plan’) covering all its employees. The Gratuity Plan provides a lump sum payment to vested employees on retirement or on termination of employment of an amount based on the respective employees' salary and the years of employment with the Group. The gratuity plan fund benefits of the Group are administered by a trust formed for this purpose and managed by Birla Sunlife. Gratuity benefit cost for the year is calculated on an actuarial basis. Current service costs for the Gratuity Plan are accrued in the year to which they relate. Actuarial gains or losses or prior service costs, if any, resulting from amendments to the plans are recognised and amortised over the remaining period of service of the employees.

The company’s liability towards compensated absences is determined on an actuarial valuation basis for the vacation balance standing to the credit of each employee as at year end.

2.16 Income taxes The current charge for income taxes is calculated in accordance with the relevant tax regulations applicable to each entity in the Group. Deferred income taxes are recognised for the future tax consequences attributable to temporary differences between the ﬁnancial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognised in income in the period that includes the enactment date. Deferred tax assets are recognised subject to a valuation allowance, when it is more likely than not that asset would not be realised.

2.17 Comprehensive income SFAS No. 130, “Reporting Comprehensive Income” establishes rules for the reporting of comprehensive income and its components. Comprehensive income is deﬁned as all changes in equity from non-owner sources. The unrealised gains on marketable securities amounting to Rs 93 and Rs 1,821 for the years ended March 31, 2006 and 2005 have been reported as a separate component of other comprehensive income.

2.18 Stock-based compensation The Group accounts for stock-based compensation using the intrinsic value method prescribed in APB No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Compensation cost for stock options is measured as the excess of the fair value of the Company’s stock on the stock options grant date over the amount an employee must pay to acquire the stock and is recognised in a graded manner on the basis of weighted period of services. The fair value of the options is measured on the basis of an independent valuation performed or the market price in respect of stock options granted.

SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair-value- based method of accounting for stock-based employee compensation plans. The Group has elected its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, an amendment of SFAS No. 123.

Biocon Annual Report 2006 Financials 15351 Had compensation cost for the Group's stock based compensation been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the impact on the reported net income and earnings per share would have been as follows:

March 31, 2006 2005 Net income as reported Rs 1,676,676 Rs 1,918,830 Add: stock compensation under APB Opinion No. 25 9,467 23,396 Less: stock compensation under SFAS No. 123 42,482 42,482 Proforma net income Rs 1,643,661 Rs 1,899,744 Earnings Per Share Basic - As reported Rs 17.59 Rs 20.26 - Proforma 17.25 20.06 Diluted - As reported 17.42 19.86 - Proforma 17.08 19.66

For purposes of applying SFAS No. 123, the estimated fair value of stock options granted in the earlier years is given in the table below.

Fair value (in Rs) Option plan 2000 – Grant 1 in April 2002 18.58 Option plan 2000 – Grant 2 in January 2004 226.57 Option plan 2004 – Grant 1 in March 2004 18.23

The fair value of each option is estimated at the date of grant using the Black Scholes method. There have been no grants during the ﬁscal year ended March 31, 2006 and 2005.

2.19 Derivative instruments and hedging activities The Group entered into forward foreign exchange contracts where the counter party is usually a bank. The Group purchases forward foreign exchange contracts to mitigate the risks of change in foreign exchange rates on accounts receivable denominated in certain foreign currencies. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting under SFAS 133 as amended. As per SFAS 133, the changes in the fair value of derivatives that are either not designated as a hedge or is so designated but ineffective, is recognized in the income statement. The change in the fair value of the derivative contracts for the year ended March 31, 2006 and 2005 was a gain of Rs 4.28 million and Rs 1.87 million respectively. Open foreign currency contracts at March 31, 2006 and 2005 amounted to US$ 57,000 and US$ 12,000.

2.20 Earnings per share Basic earning per share is computed by dividing the net income by the weighted average number of common shares outstanding during the year, excluding equity shares held by the Biocon India Ltd Employee Welfare Trust (‘the Trust’) and which are pending for grant or remained unvested as at the balance sheet date. Diluted earnings per share is computed using the weighted average of common and dilutive common equivalent shares outstanding during the year, using the treasury stock method for shares which have been granted to employees pursuant to the Employees Stock Option Purchase adopted by the Group, except where the result would be anti-dilutive.

2.21 Intangible assets In 2004 and 2005 the Company had entered into Research and Development Agreements and Investment Agreements with Nobex Corporation., USA ('Nobex') to carry out joint research and development for Oral Insulin Product and BNP products and had invested Rs 256 million in common stock and promissory notes from October 2004 through December 31, 2005.

In December 2005, Nobex ﬁled for bankruptcy under Chapter 11 of US Bankruptcy laws and subsequently the Company entered into an Asset Purchase Agreement (APA) with Nobex Corporation to purchase substantially all of the assets of Nobex including, without limitation, patents relating to certain technology for Oral Insulin, Oral BNP and Basil Insulin intellectual properties (“IP”) and its marketing rights for Rs 338,541. Biocon Limited and Subsidiaries - US GAAP

2.22 Recent accounting pronouncements In March 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140 (the “Statement” or Statement 156), amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to permit entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment or the need for an increased obligation. Entities that elect to subsequently measure their servicing rights at fair value may no longer ﬁnd it necessary to qualify for and apply the provisions of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to achieve an income statement effect similar to the application of hedge accounting for instruments used to manage the effect of interest rate changes on servicing rights. The group believes that the adoption of FAS 156 will not have a material impact on Group’s ﬁnancial statements.

On April 12, 2006 FASB issued FASB Staff Position (FSP) FIN 46(R)-6 “Determining the Variability to be Considered When Applying FASB Interpretation No. 46(R). This FSP addresses how a reporting enterprise should determine the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. 2. The variability that is considered in applying Interpretation 46(R) affects the determination of (a) whether the entity is a variable interest entity (VIE), (b) which interests are variable interests in the entity, and (c) which party, if any, is the primary beneﬁciary of the VIE. That variability will affect any calculation of expected losses and expected residual returns, if such a calculation is necessary. The group believes that the adoption of FSP will not have a material impact on Group’s ﬁnancial statements.

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. As of the required effective date, all public entities that used the fair-value-based method for either recognition or disclosure under Statement 123 shall adopt this Statement using a modified version of prospective application (modified prospective application). Under modified prospective application, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the effective date shall be recognized as the requisite service is rendered on or after the effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under Statement 123.The Group continues to assess the potential impact that the adoption of SFAS No. 123(R) could have on its financial statements.

3. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and balances available in current accounts. March 31, 2006 2006 2005 Cash on hand $ 28 Rs 1,239 Rs 1,447 Bank balances 32 1,423 18,476 $ 60 Rs 2,662 Rs 19,780

Biocon Annual Report 2006 Financials 15551 4. Marketable Securities, Available for Sale March 31, 2006 2005 Cost Fair value Cost Fair value Deutsche Mutual Fund Rs 80,000 Rs 80,000 Rs - Rs - LIC Mutual Fund 100,000 100,046 31,553 31,896 ING Vysya Mutual Fund 100,000 100,000 - - Kotak Mutual Fund 50,000 50,000 - - Reliance Mutual Fund 27,313 27,359 26,150 26,186 HSBC Mutual Fund 27,412 27,413 137,856 137,856 HDFC Mutual Fund 50,000 50,000 - - Deutsche Insta Cash Plus Fund 22,014 22,014 - - Grindlays Liquid Plan 6,178 6,178 15,608 15,623 JM Mutual Fund Liquid Plan 23,414 23,414 72,629 72,637 ING Vysya Liquid Fund 406 407 52,220 52,253 CanLiquid Fund - - 41,025 41,025 Alliance Cash Manager - - 41,698 41,698 ABN Amro Liquid Fund - - 50,124 50,124 Can Liquid Fund - - 52,488 52,488 Grindlays Cash Fund - - 104,007 104,040 HSBC Cash Fund - - 200,090 200,329 Kotak Mutual Fund - - 305,724 305,880 LIC Liquid Fund - - 87,085 87,592 Prudential ICICI Liquid Plan - - 269,313 269,313 Principal Cash Management Fund - - 115,862 115,862 Reliance Liquid Fund - - 498,831 498,889 Birla Sunlife Mutual Fund - - 21,019 21,023 TATA Liquid Fund Rs - Rs - Rs 46,915 Rs 47,304 Rs 486,737 Rs 486,831 Rs 2,170,197 Rs 2,172,018 $ 10,943 $ 10,945 $ 49,752 $ 49,794

These are highly liquid mutual funds where the cost approximates the fair market value. The gross realized gains in the form of dividend on marketable securities for the year ended March 31, 2006 and 2005 amounting to Rs 36,079 and Rs 120,800, respectively, has been included as a part of other income, unrealised gain of Rs 93 and Rs 1,821 for the year ended March 31, 2006 and 2005, respectively, has been included in Stock holder’s equity as part of other comprehensive income. Proceeds from sale of available for sale securities amounted to Rs 4,586 and Rs 12,205 for the year ended March 31, 2006 and 2005 respectively. The cost of sale of such securities are identified based on the “specific identification method”.

5. Trade Receivables, Net March 31, 2006 2006 2005 Trade receivables $ 50,729 Rs 2,256,429 Rs 1,841,676 Less: Provision for doubtful receivables 445 19,785 17,207 $ 50,284 Rs 2,236,644 Rs 1,824,469

During the year ended March 31, 2006 and 2005 the Group had written off Rs 1,501 and Rs 200, respectively, being irrecoverable amounts from identified customers. The net provision for doubtful receivables of Rs 2,578 and Rs 1,249 made during the year ended March 31, 2006 and 2005, respectively, has been made on the basis of specific customer identification.

6. Inventories March 31, 2006 2006 2005

Raw materials $ 10,854 Rs 482,787 Rs 482,787 Goods-in-transit and in bond 518 23,050 23,050 Packing materials 178 7,896 7,896 Work-in-progress 11,742 522,302 522,302 Finished goods 1,547 68,821 68,821 $ 24,839 Rs 1,104,856 Rs 737,964 Biocon Limited and Subsidiaries - US GAAP

7. Property, Plant and Equipment, Net Estimated useful March 31 life (Years) 2006 2006 2005 Land $ 1,893 Rs 84,143 Rs 41,951 Advance paid towards acquisition of Land 4,043 179,843 179,843 Buildings 25 14,173 630,415 517,981 Plant, machinery and equipment 3 – 11 57,374 2,551,996 2,145,014 Research and development equipment 9 11,383 506,302 309,061 Furniture and ﬁxtures 6 1,493 66,415 56,341 Vehicles 6 288 12,808 11,352 Capital work-in-progress 102,915 4,577,725 3,107,415 $ 193,562 Rs 8,609,647 Rs 6,368,958 Accumulated depreciation (23,650) (1,051,973) (758,890) Property, plant and equipment, net $ 169,912 Rs 7,557,674 Rs 5,610,068

Capital work-in-progress as at March 31, 2006 and 2005 include expenditure incurred towards setting up of the new facilities to augment the existing capacities for the submerged fermentation and chemical synthesis operations (collectively referred to as 'the Project').The construction of the Project is substantially complete, subject to the ﬁnal commissioning and testing of the efﬂuent treatment plant and certain pre-commissioning tests, which the Company expects to complete during the quarter ending June 30, 2006. All direct costs related to such pre-commissioning tests are included in the Capital work-in-progress and would be capitalized with the Project. Further, proceeds, if any, from the sale of trial production resulting from such pre-commissioning tests have been reduced from Capital work in progress.

On December 5, 2002, Karnataka Industrial Areas Development Board ('KIADB') allotted land aggregating 26.75 acres to the Company for Rs 64,200 on a lease-cum sale basis for a period of 6 years. Further, during the year ended March 31, 2004, the Company was allotted an additional 41.25 acres of land for Rs 99,417 from KIADB. The same is reflected at the current allotment rate, the final amount to be determined by KIADB on the completion of six years on fulfillment of certain conditions.

One of the key conditions include the commencement of commercial operations by the company within twenty four months of taking possession, which the Company believes has been complied with by the commencement of operations by Syngene on this land on October 21, 2004. During the quarter ended June 30, 2005, the Company has paid an advance of Rs 56,320 towards the allotment of additional 22 acres of land and has received the possession certiﬁcate from KIADB in January 2006 and is in the process of getting the land registered

Capital work in progress includes capital advances of Rs 8,107 and Rs 64,427 as on March 31, 2006 and 2005, respectively.

8. Other Investments Other investments comprise: March 31, 2006 2006 2005 Equity securities – Unquoted Nobex Corporation, USA $ - Rs - Rs 45,640 $ - Rs - Rs 45,640 Held to maturity debt securities Vaccinex Inc., USA- Series B1 Preferred stock $ 1,014 Rs 45,100 Rs 45,100 Vaccinex Inc.,- 3% Convertible Promissory Note 2,966 131,930 44,735 Nobex Corporation, USA – 3% Convertible Promissory Note - - 43,966 $ 3,980 Rs 177,030 Rs 133,801 $ 3,980 Rs 177,030 Rs 179,441

Nobex Corporation, USA (“Nobex”) : In December 2005 Nobex Corporation, USA ﬁled for bankruptcy under Chapter 11 of US Bankruptcy laws. Pursuant to an order issued by the US Bankruptcy court, Biocon acquired rights to transfer substantially all of the assets of Nobex including, without limitation, patents relating to certain technology for Oral Insulin, Oral BNP and Basil Insulin. Accordingly, investments amounting to Rs.338,541 as at March 31 2006 made by the Company in Nobex have been treated as a consideration for the acquisition of an Intangible Asset.

Biocon Annual Report 2006 Financials 15751 Vaccinex Inc., USA (“Vaccinex”) : Vaccinex has proprietary technology for the discovery of human therapeutic monoclonal antibodies, which will be used by the Company and Vaccinex to develop the technology further and commercialize it. The Company has entered into a ‘Securities Purchase Agreement’ with Vaccinex on November 3, 2004 to invest an amount of US$ 4 million (US$ 1 million in Series B1 Convertible Preferred Stock and US$ 3 million in Series B Convertible Promissory Notes). Further the Company has entered into a ‘Research and Collaboration Agreement’ to discover, develop, and commercialize human therapeutic monoclonal antibodies.

The Company does not have any ownership interest in Vaccinex as at March 31, 2006. The investment in the preferred stock is convertible into common stock at the option of the Company and investment in Promissory Note will mature on October 31, 2009 or is convertible into Series B1 Preferred stock at the option of either the Company or investee after a certain date.

9. Financial Instruments 9.1. Fair value of financial instruments The fair values of the Group's current assets and current liabilities (exclusive of related party amounts discussed below) approximate their carrying values because of their short maturity. Such financial instruments are classified as current and are expected to be liquidated within the next twelve months.

Long-term employee receivables are loans given to employees to acquire assets such as property and vehicles. Such loans are repayable over ﬁxed periods ranging from three to eight years and are interest-free in nature. The fair value, determined using market rate of interest, for loans to employees of Rs 12,686 and Rs 18,180 as on March 31, 2006 and 2005 is Rs 11,439 and Rs 15,644, respectively.

The Group pays interest on long term loans at a rate, which closely approximates the market rate and hence, the fair value of the long- term loan closely approximates its carrying value in the ﬁnancial statements.

As more fully discussed in Note 14, deferred sales taxes liability represents deferment of the sales tax liability of the Company for a period of 8 to 12 years. These amounts are interest free in nature and are repayable over a 5 year term after the end of the deferment period. The fair value, of the amount of deferred sales tax, carried in the ﬁnancial statements at Rs 371,517 and Rs 270,136 as on March 31, 2006 and 2005, respectively, determined using market rates of interest is Rs 192,592 and Rs 140,019 as on March 31, 2006 and 2005, respectively.

9.2. Concentration of credit risk Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash equivalents, marketable securities, time deposits, restricted time deposits and trade receivables. By their nature, all such ﬁnancial instruments involve risk including the credit risk of non-performance by counter parties.

The Group’s cash and cash equivalents and time deposits are invested with banks with high investment grade credit ratings. As of March 31, 2006, 54 per cent of cash and cash equivalents were placed with a bank. To reduce credit risk, investments are made in a diversiﬁed portfolio of mutual funds, as described in Note 4, which are periodically reviewed.

Trade receivables are typically unsecured and are derived from revenues earned from customers. The Group monitors the credit worthiness of its customers to which it grants credit terms in the normal course of the business. The Company has a customer in the United States of America who individually accounted for more than 10 per cent of the trade receivables, together with a Hong Kong based customer who accounted for 7 and 5 per cent, respectively, of the total sale of products during the year ended March 31, 2006.

In management’s opinion, as of March 31, 2006, there was no significant risk of non-performance of the counter parties to these financial instruments, other than the amounts already provided for in the financial statements.

10. Short Term Borrowings Short term borrowings from bank comprises of: March 31 2006 2006 2005 Cash credit and packing credit $ 15,233 Rs 677,549 Rs 493,279 Balance in current account 440 9,586 7,040 $ 15,673 Rs 697,135 Rs 500,319

The cash credit and packing credit borrowings are repayable on demand and carry an interest rate of 2 to 6 percent per annum for foreign currency denominated loans and 5 to 15 percent for rupee loans, and secured by pari-passu ﬁrst charge on current assets of the Company. Biocon Limited and Subsidiaries - US GAAP

Details of cash credit and packing credit: March 31 2006 2005 State Bank of India Fund and non- fund based working capital facilities Rs 200,000 Rs 200,000 Total utilization 130,007 41,567 Utilisation of foreign currency denominated loans out of above 128,856 41,245

Hongkong and Shanghai Banking Corporation Fund and non- fund based working capital facilities 545,000 545,000 Total utilization 239,405 305,340 Utilisation of foreign currency denominated loans out of above 218,419 305,340

Canara Bank Fund and non- fund based working capital facilities 200,000 200,000 Total utilization 114,586 15,512 Utilisation of foreign currency denominated loans out of above 112,116 14,451

Export Import Bank Fund based working capital facilities 310,000 310,000 Total utilization - - Utilisation of foreign currency denominated loans out of above - -

ABN Amro Bank Fund and non- fund based working capital 230,000 230,000 Total utilization 193,551 130,860 Utilisation of foreign currency denominated loans out of above 192,262 130,860

Total Total utilization 677,549 493,279 Utilization of foreign currency denominated loans out of above Rs 651,653 Rs 491,896

On August 10, 2005 all the above banks have entered into an inter-se agreement for operational convenience for the above working capital limits effecting the modiﬁcation of the above charge and creation of a pari passu charge on the current assets of the company in favour of all the above banks.

The total interest incurred for the total short term borrowings and bank charges aggregated Rs 26,398 and Rs 27,290 for the year ended March 31, 2006 and 2005, respectively, excluding interest received from suppliers amounting to Rs 8,850 and Rs 7,008 for the year ended March 31, 2006 and 2005, respectively.

11. Employee Benefit Plans The Group has employee benefit plans in the form of certain statutory and welfare schemes covering substantially all of its employees. The Group’s cost related to defined contribution plans and vacation pay is as follows: March 31, 2006 2006 2005

Provident fund $ 576 Rs 25,612 Rs 20,329 Superannuation - - 19,673

Vacation pay 376 16,724 15,634 $ 952 Rs 42,336 Rs 55,636

Biocon Annual Report 2006 Financials 15951 The change in beneﬁt obligation and funded status of the gratuity plan for the year ended March 31, 2006 are as follows: March 31, 2006 2006 2005 Accumulated beneﬁt obligation $ 698 Rs 31,037 Rs 25,827

Change in benefit obligation Benefit obligation at the beginning of the year 1,445 64,273 44,497 Service cost 249 11,074 6,962 Interest cost 72 3,190 2,205 Benefits paid (55) (2,445) (658) Actuarial loss 32 1,405 11,267 Benefit obligation at the end of the year (A) $ 1,743 Rs 77,497 Rs 64,273

Change in plan assets Fair value of plan assets at beginning of year 944 41,981 34,532 Return on plan assets (3) (134) (1,451) Actual contribution 501 22,275 9,558 Beneﬁts paid (55) (2,445) (658) Fair value of plan assets at end of year (B) $ 1387 Rs 61,676 Rs 41,981

Funded status (A-B) (356) (15,821) (22,292)

Unrecognized net transition obligation - - - Unrecognized net actuarial loss/(gain) 352 15,670 11,923 Accrued beneﬁt cost $ (3) Rs (150) Rs (10,369)

Net gratuity cost for the year ended March 31, 2006 and 2005 includes the following components:

March 31, 2006 2006 2005

Components of net beneﬁt cost Service cost $ 249 Rs 11,074 6,962 Interest cost 72 3,190 2,205 Expected return on plan assets (55) (2,451) (1,957) Recognised actuarial loss 5 242 - Net gratuity cost $ 271 Rs 12,055 7,210

The assumptions used in accounting for the gratuity plan for the year ended March 31, 2006 and 2005 are below:

March 31, 2006 2005 Discount rate 5% 5 % Expected return on plan assets 5% 5 % Rate of compensation increase 7% 7 %

The Group evaluates these assumptions based on its long-term plans of growth and industry standards and the expected contribution to the fund during the year ending March 31, 2006, is approximately Rs 15,000. The nature of the asset allocation of the fund is only debt based mutual funds of high credit rating.

The expected beneﬁt payments from the fund over the next ten years are below:

March 31, 2007 $ 74 Rs 3,285 2008 31 1,387 2009 45 1,988 2010 49 2,198 2011 213 9,481 Up to 2016 737 32,801 Biocon Limited and Subsidiaries - US GAAP

12. Other Income Other income comprises of the following: March 31 2006 2006 2005 Dividend on mutual fund units $ 811 Rs 36,079 Rs 120,800 Proﬁt on sale of investment 62 2,753 2,296 Gain on ﬁxed assets sold, net 8 346 - Miscellaneous income 242 10,754 17,423 $ 1,123 Rs 49,932 Rs 140,519

13. Provision for Income Taxes March 31 2006 2006 2005 Current taxes $ 5,326 Rs 236,883 Rs 128,340 Deferred taxes 2,589 115,151 119,089 Provision for income tax $ 7,914 Rs 352,034 Rs 247,429

Deferred tax assets: Provision for employee beneﬁts $ 351 Rs 5,592 Rs 12,430 Provision for doubtful debts 146 6,511 6,134 Others 2 106 116 Total deferred tax assets $ 499 Rs 22,209 Rs 18,680

Deferred tax liabilities: Depreciation on property, plant and equipment $ 7,292 Rs 324,334 Rs 275,407 Undistributed proﬁt of subsidiary 3,075 136,797 67,044 Total deferred tax liabilities $ 10,367 Rs 461,131 Rs 342,451

The following is a reconciliation of the income tax at the statutory tax rate under the Indian Income-tax Act, 1961 ('IT Act') and the provision for income taxes:

March 31 2006 2006 2005 Net income before taxes $ 45,607 Rs 2,028,710 Rs 2,166,259

Enacted tax rates in India 33.66% 33.66% 36.5925% Computed tax expense 15,352 682,864 792,688 Effect of tax rate change (463) (20,574) 5,996 Adjustment related to prior years - - (21,447) Undistributed proﬁts of subsidiary 1,568 69,753 35,292

Permanent differences: Non taxable export income (8,115) (360,950) (513,199) Stock compensation costs 72 3,187 8,561 Weighted deduction on research and development expenses (521) (23,161) (33,590) Share issue expenses (231) (10,297) (11,194)

Losses of subsidiary and joint venture 387 17,201 18,565 Dividend income (273) (12,144) (44,313) Others 138 6,155 10,070 Provision for income taxes $ 7,914 Rs 352,034 Rs 247,429

Biocon, Syngene and Clinigene ﬁle separate tax returns as per the applicable tax laws in India.

On July 1, 2002, Biocon received an approval from the Department of Scientific and Industrial Research to claim a weighted deduction of 150 per cent on the expenditure incurred on scientific research or in-house research and development facility under section 35(2AB) of the IT Act retroactively from financial year ended March 31, 2000.

Biocon effective August 26, 2003 received approval from the Cochin Special Economic Zone for the setting up of a 100 percent Export Oriented Unit for the manufacture and export of all types of statins on which, the Company claims exemption under section 10B of the IT Act.

Biocon Annual Report 2006 Financials 16151 Under the IT Act, the profits of certain units of Syngene and that of Biocon are exempt from income taxes being profits attributable to earnings from a 100 per cent export oriented unit. Under this tax holiday, Syngene can utilise the deduction for a period of 10 consecutive years starting from April 1, 1998. Syngene has opted for this exemption for the years ended March 31, 1999 to March 31, 2008. On February 24, 2003, Syngene obtained an approval from the Department of Scientific and Industrial Research for exemption of profits for further five year ie upto financial year 2013. Further, each of the constituent entities in the Group is eligible for a deduction from Indian income taxes for profits attributable to export operations, subject to meeting the related conditions.

During the year ended March 31, 2006, Syngene has recognised the deferred tax liability/(asset) arising on account of timing differences for one unit which no longer claims exemption under section 10B of the Act, and with respect to Unit II, for those timing differences which do not reverse during the tax holiday.

The accumulated proﬁts amounting to Rs.975,379 of Syngene as of March 31, 2006 are available for distribution to Biocon (the holding company) at the applicable tax rate for dividend distribution. For the year ended March 31, 2006, the Group has recognised the deferred tax liability for the excess of the ﬁnancial reporting basis over the tax basis of its investment in Syngene.

During the year ended March 31, 2004, Clinigene obtained an approval from the Department of Scientiﬁc and Industrial Research for exemption of proﬁts under section 80-IB (8A) of the IT Act.

Temporary differences between the ﬁnancial statement carrying amounts of existing assets and liabilities and their respective tax bases arose due to difference in depreciation rates of property, plant and equipment and provision for superannuation, leave encashment, gratuity, provision for entry tax and technical know how fees which are allowable on a payment basis under the IT Act. Since export turnover of the Group qualiﬁes for a deduction from taxable income, a substantial portion of the temporary differences would not have any tax consequences, as they will reverse within the tax holiday period and, accordingly, no deferred tax assets and liabilities have been recognised relating to such temporary differences.

14. Deferred Sales Taxes Liability The Company has obtained the beneﬁt of deferring its sales tax liability for its manufacturing facilities in Bommasandra and Hebbagodi, to an extent of Rs 24,375 and Rs 648,938, in accordance with the Agro Food Processing Industrial Policy of the Government of Karnataka, for a period of 8 years and 12 years, respectively. In accordance with the Government Order, the Group has deferred its sales tax liabilities aggregating to Rs 371,517 and Rs 270,136 as on March 31, 2006 and 2005, respectively, which is to be repaid over various dates commencing from September 2009.

15. Long Term Debt During the year ended March 31, 2006 the Company has entered into an agreement with the Council of Scientiﬁc and Industrial Research ('CSIR') to avail long term loan amounting to Rs 4,030 for carrying out part of the research and development project under the New Millennium Indian Technology Leadership Initiative ('NMITLI') Scheme. The annual interest of three percent and the principal amount is repayable over a period of 10 years commencing from October 1, 2008. As at March 31, 2006 the Company had drawn Rs 1,410.

16. Stockholders' Equity The Group has only one class of common stock referred to herein as equity shares. Each holder of equity shares is entitled to one vote per share.

Dividends proposed by the Board of Directors are payable when formally approved by the shareholders, who have the right to decrease but not increase the amount of the dividend recommended. The Company accrues for dividend upon obtaining shareholders approval. Dividend on equity share issued during a ﬁscal year is paid from the date of issue of these shares. The Company paid cash dividends and dividend tax of Rs 200,000 (Rs 2 per share) and Rs 28,050 and Rs 100,000 (Rs 1 per share) and Rs 12,813 during the period ended March 31, 2006 and 2005 respectively.

Under the Indian Companies Act, all Indian Companies are mandatorily required to restrict certain portion of its retained earnings by transfer of such amounts to general reserve for distribution of dividend beyond a speciﬁed percentage. General reserves for the Company as at March 31, 2006 and 2005 amounted to Rs 823,279 and Rs 689,796 respectively.

17. Stock Option Plan ('Option Plan') On September 27, 2001, the Board of Director's approved the Biocon Stock Option Plan 2000 ('the Option Plan 2000') for the grant of stock options to the employees of Biocon and its subsidiaries. A compensation committee has been constituted to administer the plan.

The options will vest with the employees equally over a four-year period. In accordance with the plan during the year ended March 31, 2003, the Company had granted 3,502,260 options to the eligible employees of the Company and its subsidiaries. 25 per cent each of the total options granted under the plan will vest to the eligible employees on the completion of 12, 24, 36 and 48 months and is subject to the continued employment of the employee with the Company or its subsidiaries.

Further, during January 2004, the Compensation Committee granted 142,100 options under the Option Plan 2000 effective January 1, 2004 to be exercised at a price of Rs 5. The options will vest with the employees equally over a four year period from the grant date. On January 18 2004, the Board of Directors announced the Biocon Stock Option Plan ('the Option Plan 2004') for the grant of stock options to the employees of the Group, pursuant to which, the Compensation Committee on March 19, 2004 granted 422,000 options under the Option Plan 2004 to be exercised at a price of Rs 315 being the issue price determined for the IPO through the book building process. The options will vest with the employees equally over a four year period from the grant date.

In case the employee resigns from employment, the rights relating to shares, which are eligible for exercise, may be purchased by payment of the exercise price whereas, the balance shares shall be forfeited in favour of the ESOP Trust.

The Group applied APB Opinion 25 and related Interpretations in accounting for these plans. In accordance with APB Opinion 25, the compensation cost has been recognised for the differential between the exercise price and the fair value of value of the shares on the date of the grant. The compensation cost is recognized in the ﬁnancial statements over the vesting period. The percentage to be recognized in each year is based on the aggregate percentage accrued to the employee at the end of each year.

The Trust had 4,432,567 equity shares of Rs 5 each as of March 31, 2006 of which 3,208,715 shares have not been granted and a summary of the activity of the Trust is as follows: March 31, 2006 2005 Particulars No of Weighted average No of Weighted average options price (In Rs) options price (In Rs)

Outstanding at the beginning of the year 2,263,857 53.19 3,098,946 43.29 Granted during the year - - - - Exercised during the year (969,622) 4.05 (778,997) 0.42 Forfeited during the year (70,383) 156.18 (56,092) 238.89 Outstanding at the end of the year 1,223,852 86.21 2,263,857 53.19

Price range for the options outstanding is as follows:

Grant price (Rs) No. of options outstanding March 31, 2006 2005 0 – 5 813,227 1,841,857 300 – 320 410,625 422,000

The total stock compensation cost recognised in the consolidated statements of income for the year ended March 31, 2006 and year ended March 31, 2005 is as follows: March 31, 2006 2006 2005

Cost of products sold $ 44 Rs 1,974 Rs 6,250 Cost of contract research services 56 2,510 5,677 Research and development expenses 35 1,545 2,685 Selling, general and administrative expenses 78 3,438 8,784 $ 213 Rs 9,467 Rs 23,396

Shares allocated to the employees have been considered as outstanding for basic EPS to the extent they are vested. Shares held by the Trust, which have been allocated but not vested have been included for diluted EPS. The loan granted to the Trust is presented as a separate component of stockholders' equity and repayments of the loan, by way of exercise of the shares by the employees is applied towards repayment of the said loan. As of March 31, 2006 and 2005 the trust has repaid the entire loan.

Biocon Annual Report 2006 Financials 16351 The following is a reconciliation of the weighted average number of equity shares used in the computation of basic and diluted earnings per equity share: March 31, 2006 2005

Weighted average number of common shares used for computing basic EPS 95,305,796 94,695,763 Dilutive component of shares that are not eligible for exercise 918,089 1,925,321 Weighted average number of shares used for diluted EPS 96,223,885 96,621,084

18. Leases The Group has entered into lease agreements for certain of its premises, which expire upto 2015. Gross rental expenses for the year ended March 31, 2006 and 2005 aggregated to Rs 570 and Rs 480, respectively. The committed lease rentals in the future are:

March 31, 2007 $ 18 Rs 789 2008 18 808 2009 17 739 2010 6 252 2011 6 277 Upto 2015 37 1,625 $ 51 Rs 4,490

The Group has taken vehicles for use by certain employees under operating leases, which expire in January 2010. Gross rental expenses for the year ended March 31, 2006 and 2005 aggregated to Rs 5,794 and Rs 6,450, respectively. The committed future minimum lease rental payments are:

March 31, 2007 $ 140 Rs 6,226 2008 118 5,233 2009 51 2,277 2010 14 633 $ 323 Rs 14,369

19. Related Party Transactions The remuneration paid to KMZ and JMM in accordance with the agreement entered into by them with the Company for the year ended March 31, 2006 and 2005 was Rs 19,723 and Rs 19,854, respectively.

The Company has funded the operations of BBPL by way of extending long-term interest bearing loans repayable after commencement of commercial operations. As at March 31, 2006 and 2005 the loan outstanding was Rs 461,197 and Rs 102,565 respectively, of which Rs 15,406 and Rs 2,925 respectively relates to interest payable to the Company on such funding.

20. Commitments and Contingencies (a) Capital commitments The Group had committed to spend approximately Rs 382,984 and Rs 1,005,240 as at March 31, 2006 and 2005, under agreements to purchase property, plant and equipment. This amount is net of advances paid in respect of these purchases (Refer Note 7).

(b) Guarantees Guarantees provided by banks on behalf of the Group amounted to Rs 818,828 and Rs 578,739 as at March 31, 2006 and 2005, respectively, which mature over periods upto March 2015. The guarantees are primarily in the nature of performance guarantees and were provided to Indian Government agencies. The Group has concluded that the risk of the guarantees being called is remote and accordingly no provision has been made.

(c) Claims against the Group The Group accounts for loss contingencies when the likelihood of the underlying adverse event occurring is probable and the loss can be reasonably estimated. Biocon Limited and Subsidiaries - US GAAP

(i) Taxation matters under appeal Biocon has received demand notices from the Income tax authorities in respect of assessments made in the year 1993 to 2003 aggregating Rs 12,900 and Rs 9,895 till March 31, 2006 and 2005, respectively. Biocon has appealed these assessments and management does not anticipate incurring a liability in respect of these amounts.

(ii) Other claims against the Group not acknowledged as obligations amount to Rs 2,170 as of March 31, 2006 and 2005, respectively.

(d) Other commitments Some of the Group’s operations are carried out from ﬁve units registered as a 100 per cent export oriented unit under the Special Economic Zone (‘SEZ’) scheme. Under this scheme the registered units have export obligations, which are based on the formula provided by the notiﬁcations/circulars issued by the SEZ authorities from time to time. The consequence of not meeting the above commitments would be a retroactive levy of import duty on items previously imported duty free for these units. Additionally, the respective authorities have rights to levy penalties for any defaults on a case-by-case basis. Management believes that it would meet the required export obligations.

21. Segment reporting and related information The Chief Operating Decision Maker ("CODM") evaluates the Company's performance and allocates resources based on an analysis of gross proﬁt by product segment. The product segment reviewed by the CODM are as follows: Enzyme Pharma and Contract Research

(a) An analysis of revenue, gross proﬁt and other related information is given below:

April 1, 2005 to March 31, 2006 In Rupees ‘000 Contract Particulars Enzyme Pharma Research Unallocated Eliminations Total Revenues External sales 849,563 6,025,361 1,005,756 - - 7,880,680 Inter-segment transfers 72,294 - - - (72,294) - Total revenues 921,857 6,025,361 1,005,756 - (72,294) 7,880,680 Costs Segment costs (523,481) (3,660,753) (497,049) - - (4,681,283) Inter-segment transfers - (72,294) - - 72,294 - Gross Proﬁt 398,376 2,292,314 508,707 - - 3,199,397 Research and development expenses - - - (195,737) - (195,737) Selling, General and administrative expenses - - - (677,720) - (677,720) Depreciation (26,911) (142,463) (68,003) (55,706) - (293,083)

Income from operations 371,465 2,149,851 440,704 (929,163) - 2,032,857

Share of losses in Joint Venture - - - (40,234) (40,234) Interest income - - 1,134 380 - 1,514 Interest expense - - (577) (16,971) - (17,548) Other income - - 20,152 31,969 - 52,121

Income before provision for income taxes 2,028,710 Provision for Income taxes - - - (352,034) - (352,034) Net Income 1,676,676

Other information Segment assets 626,616 8,864,941 1,515,470 1,629,714 - 12,636,741 Segment liabilities 138,006 1,751,748 265,688 1,497,293 - 3,652,735

Capital expenditure 10,073 114,648 311,385 335,361 - 771,467

Biocon Annual Report 2006 Financials 16551 April 1, 2005 to March 31, 2006 In $ ‘000 Contract Particulars Enzyme Pharma Research Unallocated Eliminations Total Revenues External sales 19,100 135,462 22,611 - - 177,173 Inter-segment transfers 1,625 - - - (1,625) - Total revenues 20,725 135,462 22,611 - (1,625) 177,173 Costs Segment costs (11,769) (82,301) (11,175) - - (105,245) Inter-segment transfers - (1,625) - - 1,625 - Gross Proﬁt 8,956 51,536 11,436 - - 71,928 Research and development expenses - - - (4,401) (4,401) Selling, General and administrative expenses - - - (15,237) - (15,237) Depreciation (605) (3,203) (1,529) (1,252) - (6,589)

Income from operations 8,351 48,333 9,907 (20,890) - 45,701

Share of losses in Joint Venture - - - (905) (905) Interest income - - 25 9 - 34 Interest expense - - (13) (382) - (395) Other income - - 453 719 - 1,172 Income before provision for income taxes - 45,607 Provision for Income taxes - - - (7,914) - (7,914) Net Income 37,693

Other information Segment assets 14,088 199,302 34,071 36,639 - 284,100 Segment liabilities 3,103 39,383 5,973 33,662 - 82,121 Capital expenditure 226 2,578 7,001 7,540 - 17,345

April 1, 2004 to March 31, 2005 In Rupees ’000 Contract Particulars Enzyme Pharma Research Unallocated Eliminations Total Revenues External sales 896,814 5,566,810 662,040 - - 7,125,664 Inter-segment transfers 84,128 - - - (84,128) - Total revenues 980,942 5,566,810 662,040 - (84,128) 7,125,664 Costs Segment costs (505,705) (3,407,711) (336,158) (36,354) - (4,285,928) Inter-segment transfers - (84,128) - - 84,128 - Gross Proﬁt 475,237 2,074,971 325,882 (36,354) - 2,839,736 Research and development expenses - - - (146,632) - (146,632) Selling, General and administrative expenses - - - (439,763) - (439,763) Depreciation (26,386) (105,274) (42,484) (46,052) - (220,196)

Income from operations 448,851 1,969,697 283,398 (668,801) - 2,033,145 Share of losses in Joint Venture - - - (21,284) - (21,284) Interest income - - - 2,543 - 2,543 Interest expense - - (342) (19,940) - (20,282) Other income - - - 172,137 - 172,137 Income before provision for Income taxes 2,166,259 Provision for Income taxes - - - (247,429) - (247,429) Net Income 1,918,830

Other information Segment assets 636,117 6,519,171 851,700 2,858,668 - 10,865,656 Segment liabilities 132,476 1,917,232 213,895 1,165,912 - 3,429,515 Capital expenditure 18,917 568,327 364,594 202,530 - 1,154,368 Biocon Limited and Subsidiaries - US GAAP

(b) An analysis of revenue by Geography (based on location of customers) is given below:

Revenues, net (In Rupees) 2006 2005 India 3,290,600 2,711,746 Exports 4,590,080 4,413,918 Total 7,880,680 7,125,664

Assets and additions to ﬁxed assets by geographical area - The following is the carrying amount of segment assets by geographical area in which the assets are located. Carrying amount of segment assets (In Rupees) 2006 2005 India 11,308,630 9,930,066 Outside India 1,564,962 935,590 Total 12,873,592 10,865,655

Carrying amount of segment assets outside India represents receivables from export sales.

Segment revenue and result The expenses that are not directly attributable and that cannot be allocated to a business segment on a reasonable basis are shown as unallocated corporate expenses.

Segment assets and liabilities Segment assets include all operating assets used by the business segment and consist principally of ﬁxed assets, investments and current assets. Segment liabilities comprise of loan funds which can be identiﬁed directly against the respective segments and includes segment current liabilities and provisions. Assets and liabilities that have not been allocated between segments are shown as part of unallocated corporate assets and liabilities respectively.

Biocon Annual Report 2006 Financials 16751 [THIS SPACE HAS BEEN INTENTIONALLY LEFT BLANK]